Home Loan Qualifying- Plan For It
Home Loan Qualifying is the first step in buying a home, so plan for it! Financing a home can be hard for many people. Below are 10 things to use as a guideline and plan of action. There are things you can do to save money and buy more house.
Qualifying for a home loan matters in your monthly payment each month and your ability to buy a house. Give yourself the best ability to acquire the lowest interest rate and terms from a home lender for your desired loan amount. Shop rates and interview mortgage lenders.
There are “out of the box” loans, so don’t get discouraged. Fitting into the “normal loan” box will often give you the best interest rate. Since home loans are usually for 30 years, mortgage interest rates matter a lot!
How Do Mortgage Loans Work?
The US Government buys mortgages AKA home loans, after the lender packages the loan and funds it. The loan is then sold by the lender on “the secondary market.”
The government entities that buy their loans are Fannie Mae and Freddie Mac. Often other investors who want long-term investments will also buy them.
Housing loans are called Mortgage-Backed Securities. They are considered a secure investment because the investor can have the house if you default. Retirement funds are a great example of investors looking for secure investments. Banks like to buy mortgages because they also make money doing the monthly accounting.
Since Fannie Mae buys the most mortgage loans, most lenders use their guidelines as criteria for granting or turning down a loan. There are “sub-prime” loans or borrowers who do not fit into the Fannie Mae box which we will also touch on.
Create A Plan For Your Home Loan Qualifying
There are steps you can take to fit into Fannie Mae’s guidelines. The best interest rates can considerably lower your house payment for many years so this is important.
Even a 1/4% to 1/2% higher interest rate adds up. The first thing you want to do is meet with a lender. You want one you like but also one with good rates.
Before you meet in person you may want to talk with them on the phone. You do not need to pay for a credit report up-front. They can run a preliminary report and often have a monthly service they pay.
If they ask for money first thing, make another phone call. Home loan qualifying is very detail-oriented. Higher mortgage rates can greatly increase a monthly payment.
Your best chances of qualifying for a home loan are to follow a few simple steps. Making a plan of action is a good first step. A Realtor can always answer lending questions too- just ask.
The most important thing to do is to keep your payment where you feel comfortable. If $1500 a month is what you pay now and $1600 is stretching it, buy a house with a $1500 a month payment even if you qualify for more.
The most important thing to a mortgage lender is your debt to income ratio. Let’s figure out where your money does the most good before you buy.
Your Plan Of Action Should Include:
Use receipts to create a budget that reflects your actual habits. This should cover most of the surprises, the actual bills, utilities, and groceries.
You’ll spot some areas to save for a down payment. Making your coffee and meals at home for a few months might be all you need to do.
Plan To Reduce Debt:
When qualifying for a home loan, your debt to loan ratio is calculated first. Verify that your debt to house payment ratio is under 40% of your income. And remember that they don’t want your mortgage to be more than 25 and 28 percent of your net household income.
Therefore, you’ll need to get monthly payments on the rest of your installment debt reduced if possible. These include car loans, student loans, and revolving balances on credit cards. Get them down to between 8 and 10 percent of your net monthly income.
Car loans are not counted as debt if you have 10 payments or fewer left. This means: do not worry about paying off a short-term car loan. You might want to make a few payments to get down to 11 months. Hint-hint.
Increase Your Income:
Now’s the time to ask for a raise! Family contributions might be an option too. Another option is to sell extra “stuff.” You may want to consider taking on a second job.
Your goal is to get your income and savings at a level high enough to qualify for the home you want. To qualify for more, you need to make more money, put more money down or to reduce your debt.
Saving For A Down Payment:
Qualifying for a mortgage loan requires a down payment and closing costs. We can get creative by asking the seller for money and adding to the price offered for the home. You can also pay an additional 1/4-1/2% in interest rate to cover closing costs. We can get creative – let’s strategize.
Ideally, 5%-22% of the purchase price is what you should have saved before you start looking for a house. Although there are programs and ways to buy a home with a 3.5% downpayment, the cost of the money you borrow is higher.
Lenders like to see money in your bank or investment account for a minimum of 3 months. They want to see that your down payment is not illicitly gained funds. Home loan qualifying is heavily regulated.
Private Mortgage Insurance
Private mortgage insurance (PMI) is charged to borrowers who put under 20% down. The rate fluctuates with the lowest down payment paying higher rates.
Sometimes you may have to weigh putting 20% down between paying off debt to lower ratios or qualifying for a larger loan. Don’t forget that besides the down payment, there are closing costs.
Keep Your Job To Qualify:
Home loan qualifying is based on employment. Having a job in the same line of work for two years is the guideline used. OR being a new college graduate can be an exception. For most everyone- Don’t quit your job quite yet! Don’t become self-employed yet!
Establish Good Credit History:
Financing can be tricky. The lender will package your paperwork and send the package to an underwriter. An underwriter wants to see that you have a life and can afford to finance a new home.
They want to see that you have a credit card or two and make payments by the due date. They’ll also want to see that you haven’t ever negotiated down a loan after not paying for a while. If you’ve screwed up, give it at least 10-12 months to raise your credit score.
Also, pay all other bills, including utilities, on time. Utilities can be used as a credit reference with an FHA loan. AUTO-PAY EVERYTHING! Try to use only 1-2 credit cards and pay them off each month.
Home Loan Apps Need Credit Reports:
Go to: www.annualcreditreport.com for your free annual credit report. Make sure it is accurate and correct any errors immediately.
A free credit report provides a history of your credit, bad debts, and any late payments. Unfortunately, most free reports do not have your actual FICO score, which is the magic number everyone wants to know.
Paying for a credit report will give you your actual credit score. But, see if you have negative credit to clear up first. We also suggest that you pay for your own credit report to take with you or to send lenders for an initial pre-qualification and quote.
The above video is from the Federal Trade Commission and is only a few minutes long. It’s worth watching. As I said above, don’t pay for a credit report until you are ready. Some lenders try to get you to pay $50-$100 for a report to get you committed. I suggest that you carry your own “paid for credit report” with your own FICO Score on when you are ready to shop interest rates and lenders.
Home Owner’s Insurance:
Talk to your insurance agent to make sure you have no red flags. If you have repeated robberies under your name or arson, they would hurt your chances of getting Homeowner’s Insurance. Also, ask what percentage your car insurance would go down if they got an additional type of policy (if you don’t currently own your home.)
TIP: If you are currently renting without renter’s insurance, call your auto insurance company. You should be able to add it for no additional cost by getting a multi-policy discount. Shopping car insurance rates might also save you money.
Accounting, Payments, and Loans:
Rule of Thumb- homes valued between two and three times your gross income will be in your price range. Your lender will tell you what you can finance based on your ratios. What’s really important is what size payment you feel comfortable with.
Keep in mind that if you finance your home, you may have interest and property tax write-offs. Do you want a 15 or 30- year loan? Fixed or adjustable-rate mortgage?
Note: If you have a 30-year mortgage and make a payment every 4 weeks, not every month, you will pay your house off 8 years sooner. With rates so low, you’ll probably want a fixed rate.
Investigate Down Payment Assistance Programs:
Right now, Nevada has a 3% grant program so ask your lender about it. If your lender doesn’t know about this program, call or email us. Let us refer you to a lender who’s on top of all of the downpayment assistant programs.
The State of Nevada has a program with an interest rate based on your credit score. Even with good credit, the rate is higher than normal. Nothing is free, however, owning a house is worth it.
After 3 years of occupying the house, you do not need to pay the money back. Another possible source for down payment money is an IRA and 401K plan. Often you can use the money you’ve saved to buy your first home without a penalty.
Trustees usually allow access to trust monies for home purchases. Give your broker or trustee a call, so you know for sure! If a family member is gifting funds, get them and deposit them into your bank account. Remember, all money must be trackable for at least three months. No cash- empty the mattress!
While In Escrow, DO NOT Spend Money:
Pack, meditate, exercise, sleep but resist going to any store except for a grocery store. Stores are evil! Wait until after you move, then have fun shopping!
Know that all of your home loan qualifying efforts can go POOF! with just one credit card purchase. And, in most cases, if you blow your home loan qualifying all by yourself, you may lose your earnest money.
If you have to cancel right before closing, your loopholes are gone. Sellers will be extremely unhappy and not very understanding. Please don’t give your money away by letting this happen- it’s pretty lousy.
Remember, you don’t want to go shopping. Don’t put a deposit on anything. Stay out of the casino. No pool buying yet! No new car yet! Please don’t blow your home financing out of the water.
So, let’s make a Rule of Thumb: DON’T CHANGE ANYTHING UNTIL YOU HAVE KEYS! Look at ideas on Pinterest, just hide your credit cards, and stay home and pack! (These warnings are based on our past client’s sad experiences)
Qualifying For More Money:
Often people can afford a larger monthly payment than they are approved for. Everyone has a unique situation, so I’ll mention a few things that will let you see that there are options. Ask every lender that you interview questions! They might have a strategy that you can utilize. Qualifying for more money can be technical.
With VA loans, child care costs count as debt affecting your debt-ratio. Possibly getting a conventional loan would work better for you if you have kids in child care. Association fees are another factor. Ask if your loan type qualifications are affected by these additional fees.
Home loan qualifying can be a pain, but it’ll be worth it for years to come. Buying a home is often the most expensive investment you’ll ever make, so plan for it and get the home you want.
Alternative Loan Programs
Self-employed people need a P & L, 1099’s, and tax returns for two years. Income is averaged. If you don’t have established credit, FHA grants loans using utility bills as credit.
Hard money is quite expensive but makes sense sometimes. Owner Will Carry (OWC) financing is less prevalent since interest rates are lower. Bridge loans and lines of credit can be quite helpful.
Qualifying For A Loan In 2021-2022 Tips
Making an offer on a house with a home-selling contingency is a tough offer to have accepted in Las Vegas in 2021-2022. Cash and loan-approved buyers will win every time before someone with a home to sell. If you don’t want to sell your house before buying a new house you have options.
We sold a house where the seller needed 45 days until their new house was finished being remodeled. Our client bought it to close in 2 weeks and let them stay free of charge for a month. Of course, the price offered accounted for the rent but they chose our offer. Let’s get creative and strategize!
There are a hundred ways to buy or sell a house. A home seller can sell and not move for a while. Having a strong downpayment or cash to buy a house gives you buying power. Higher-end properties aren’t as competitive so that’s a factor too.
Shop rates and interview your Realtor and Lender. Do not automatically use the builder’s lender for a new home. We had a client turn down a $10,000 incentive because of the interest rate. Do the math – some lenders are like car dealers where they try to earn the most money possible on a loan.
Online lenders have good rates. Timeline and closing on time have been a problem for our clients. When closing late on a house, you can lose it and your earnest money. It’s not worth the risk. They also only do “in the box” type of cookie-cutter loans. If you are self-employed, don’t bother looking online.
Get A Creative and Experienced Lender In 2021-2022
Bridge loans have a higher interest rate. Creative financing may save you a considerable amount of money where re-financing is not needed. Here’s one example: what if you got an 80% regular home loan with a 10% 2nd trust deed and a 10% line of credit on your existing house?
When your house closes escrow, you can pay off the smaller loans and not have any mortgage insurance in the meantime. Or a 70-20-10. Let your experienced lender make suggestions- this is their job.
This website and information are made available for you to explore by Kurt Grosse with Realty One Group. Kurt is a Las Vegas Top-Producing Realtor since 1996 and a former Nevada Building Engineer, a PE, CE.
His goal with his buyers and sellers is to use his skills and knowledge to protect them. Homes are not built perfectly even though they look good. With how quickly homes are built in Southern Nevada, his skills are invaluable.