Home Loan Qualifying- Plan It
Financing a home can be hard for some people. Below are 11 things to use as a guideline and plan of action for what you can do to give yourself the best ability to acquire the lowest interest rate and terms from a home lender.
There are many kinds of loans that we will explain later that don’t fit into the “normal” loan category. Fitting into the “normal loan” box will give you the best interest rate. Since home loans are usually for 30 years, this can add up to be a lot of money.
Create A Plan Of Action That Includes:
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. Making your coffee and meals at home for a few months might be all you need to do.
Plan To Reduce Debt:
When financing is applied for, lenders look for a debt load (the ratio of- debt vs. income) of no more than 36 percent of your net income. Your ratios include your mortgage, which typically ranges between 25 and 28 percent of your net household income.
Therefore you’ll need to get monthly payments on the rest of your installment debt—car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income. Car loans are usually not counted as debt if you have 10 payments or fewer left.
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 or to reduce your debt.
Saving For A Down Payment:
Ideally, 7%-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. Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with 5 percent down or less, you will get a better rate and avoid mortgage insurance if you put down a larger percentage of the purchase price.
Aim for a 20 percent down payment, which is the best because mortgage insurance will go away. Remember that you may have to weigh putting 20% down between paying off debt to lower ratios or to qualify for a larger loan. Don’t forget that besides the down payment, there are closing costs.
Keep Your Job
Having a job in the same line of work for two years is the guideline used. Don’t quit your job quite yet! Don’t become self-employed yet!
Establish Good Credit History:
Financing can be tricky. The lenders package your paperwork and send it 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 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. See if you can clear up negative credit. 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. 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 so you can shop multiple lenders.
Home Owner’s Insurance
Talk to your insurance agent to make sure you have no red flags that 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.
Payments and Loan:
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 Help
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, and we will refer you to a lender who’s on top of everything. 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 it and deposit it into your account 3 months in advance. All money must be trackable for at least three months. No cash- empty the mattress!
While In Escrow, DO NOT Spend Money
When financing a home, lenders do a last-minute credit check before closing. Be Patient! Pack, meditate, exercise, sleep but resist going to any store except for a grocery store. They are evil! Wait until after you move, then have fun shopping! Any additional line items could change you from qualifying for a loan to not qualifying.
At this point, if you cancel, the sellers will be extremely unhappy and will try to keep all earnest money. 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! You can still blow your home financing out of the water. So, let’s make a Rule of Thumb: DON’T GO SHOPPING 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.
The best advice that I can give is to ask a lender how you can be creative, so you’ll qualify for more. When your car has 10 more payments, it no longer counts as a monthly debt, which can raise the dollar amount you qualify for by a lot. You might be better off taking $2000 – $5000 of downpayment and paying off 10 months of your car payments.
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. 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.
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 Retired Building Engineer (P.E., C.E.). His goal with his buyers and sellers is to use his skills and knowledge to protect them in this ever-changing Las Vegas Real Estate Market. With how quickly homes are built in Southern Nevada, his skills are invaluable.
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