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It's a scary and overwhelming thought, right? Well, it doesn't have to be. Buying a home is one of the biggest financial decisions you might ever make in your lifetime. Being prepared and researching ahead of time can make the process virtually hassle free.
Whether you are a first time home buyer or an experienced buyer, make sure you are aware of these basic mortgage facts before obtaining a home loan.
After the sub-prime mortgage crisis, banks and lenders became more strict about who they would lend to and the qualifying factors involved. This means in order to qualify for a home loan you must have a decent credit score.
Usually lenders will use your mid-score to determine credit eligibility. Your mid-score is derived from the median between your three credit bureau scores (Equifax, Experian, and TransUnion). For example, if your three scores are 710, 688, and 660, lenders will qualify you based on your score of 688. Stay up to date and regularly check on your credit report to make sure there is no fraudulent activity and everything is reporting as it should.
Besides just affecting your eligibility for the loan, your credit score also affects the interest rate on your mortgage. The better score you have, the better rate you will receive. Maintaining good credit will not only help you qualify for a mortgage but it can save you money in high interest payments.
Besides just looking at your income, lenders use debt as a determining factor for loan eligibility. Most loan programs have a Debt-to-Income (DTI) ratio you must meet in order to qualify, meaning the amount of monthly payments you have compared to the amount of income you make creates a certain ratio.
The best thing to do is start paying down any high amounts of debt. Ideally, you want no more than a 30% utilization of your lines of credit. For example, if your credit card has a limit of $1000, you never want a balance of more than $300 on that card.
Don't be surprised when your loan officer asks you for personal and financial documentation. Lots of it. Think of it in this aspect: If you were letting someone you didn't know borrower hundreds of thousands of dollars, wouldn't you want all the necessary documentation to show they could pay you back?
Tax returns, W2's, income statements, pay stubs, and bank statements. All documentation you should be prepared to hand over to your loan officer. Having these items in advance will also save you time during the loan process so can you get into your dream home faster.
Interest rates for home loans are tied to indicators in the overall economy, and change daily. Rates can rise and fall, sometimes up to a 1/2 of a percent in a day. Once you speak with your loan officer and are comfortable with your interest rate quote, make sure to lock it in as soon as possible.
Just because you don't have 10 percent or more to put down on a mortgage doesn't mean you can't buy a home. There are government programs available that allow you to put as little as 3 percent down and in some cases, such as with a VA loan or USDA loan, there is no down payment required. These programs are worth looking into and your qualified loan officer will be able to provide you with more information.
Unlike other loans, the interest you pay on your mortgage can be deducted from your taxes at the end of the year. This is one of the best perks of being a homeowner and could end up saving you big bucks. Be sure to ask your tax professional about this credit after purchasing a home.
Trying to apply for a home loan can seem intimidating, but if you follow these steps you are bound for a much smoother transaction.
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