Getting qualified for a home loan is a vital part of the home buying process. Without the proper financing, potential home buyers will be unable to purchase they home they desire. Applications for home loans are handled on a case-by-case basis, and the financial circumstances of each applicant will be taken into consideration. There are two basic factors that lenders will use to determine if a loan applicant will qualify for a loan: an applicant's ability to repay the loan and their willingness to repay the loan. A loan applicant's ability to repay the loan will be determined by the applicant's current employment and total income. An applicant's willingness to repay the loan will be assessed by the applicant's payment history and how the property will be used. To help lenders reach a satisfactory conclusion to an applicant's ability and willingness to repay a loan, there are steps applicants can take to present themselves in a favorable light.
Things Loan Applicants Should Know:
Being aware of the following can help applicants reassure prospective lenders of their financial stability as well as their ability and willingness to repay the loan.
1. Their Finances – knowing one's finances can help applicant's ensure they get qualified for the loan best suited to their needs and at the best rate possible. Being unaware of this information could put applicants at risk of qualifying for a home loan that will cost them a considerable amount to repay.
2. Their Credit Score – an applicant's credit score will be a factor lenders use to determine loan qualification. The more favorable an applicant's credit score, the better the rates and terms of the loan will be. There are ways that applicants can improve their credit score when necessary.
3. Have a Down Payment – having a good down payment for a loan will help applicants secure the home loan they desire. Large down payments signal to lenders that applicants are in control of and responsible for their finances. Sizable down payments can help applicants avoid paying private mortgage insurance (PMI).
4. Reduce Credit Card Debt – loan applicants that have an abundance of credit card debt could have problems qualifying for a loan. It will be important for loan applicants to reduce their credit card debt as much as possible or completely in order to qualify for the loan they need. Credit card debt will be included in non-housing expenses, which can negatively affect an applicant's debt-to-income ratio.
5. Their Debt-To-Income Ratio – debt-to-income ratio is extremely important during the loan qualification and approval process. Debt-to-income ratio takes into account an applicant's pre-tax income along with their housing and non-housing expenses. To qualify for a loan, the mortgage amount typically cannot exceed 29 percent of the applicant's pre-tax income. Additionally, the mortgage and non-housing expenses should not exceed 41 percent of the applicant's pre-tax income.
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