First time home buyers seldom buy their dream home with cash. So taking a mortgage is the easiest way to get financing for your home. But even when you’ve saved enough money to make a down payment, the process will not be over in one night. You will need to provide proof of earnings, tax returns, credit history and a host of other documents. To help you have a low-stress loan approval and closing process, you need to consider the following.
Proof of Regular Earnings
You must have a steady stream of income before you qualify for your home loan. You could show proof of your income in the form of dividends from stock and bonds, support from your adult children and payment of alimony. Bear in mind that if you are self-employed and you have an irregular income, you pose a higher risk to your lender. In this case, you must have a high credit score and sufficient savings to reduce the risk associated with your loan.
Improving your credit score can help you save tens of thousands of dollars in loan payments over time. Lenders will check your credit score carefully before approving your loan. If you have a score that is at least 660, you are in the prime range. This qualifies you for lower interest rates. But a score below 620 is subprime and you will have to take a loan with a higher interest rate. In some cases, if the score is very low, you have to take steps to increase it before you can get your loan approved.
To calculate the risk that lenders are taking by giving out a home loan, they use a debt-to-income ratio. Many lenders adopt the 28 to 36 percent qualifying ratio. Generally, 28 percent stands for your gross income before tax. This income can cover the payment of interest and home insurance. The 36 percent stands for the part of your income which can cover recurring housing expenses, credit card debt and car loans.
Virtually all lenders want you to make a down payment before you get approval. This payment ranges from 5 to 20 percent of your home’s selling price. But loans insured by the state will attract a lower down payment. You can determine your loan down payment using reliable free online calculators. Remember, that the larger the initial deposit, the greater the equity you have in the home.
Obtaining a pre-approval can help you to reduce the time for closing. After you have looked at the home loan options offered by your preferred lender, ask for a pre-approval. Your lender will examine your credit history and other important documentation. Then you will receive pre-approval to buy a home within a certain price range. This helps you to avoid wasting time on more expensive houses that your lender will not approve. In many cases, loan pre-approval lasts for up to three months.
Private Mortgage Insurance
Private mortgage insurance (PMI) helps to protect your lender from loss if you can’t pay your loan. Not all loans need PMI. If you are putting down a deposit that is up to 20 percent or more, you may not need to pay this type of insurance. You can also avoid this insurance if you break up your mortgage into two parts or if you agree to pay a higher interest rate.
Cost of the Home
The selling price of your desired house has a major influence on your mortgage approval. For instance, if you have obtained pre-approval and you decide to buy a home that is more expensive than the permitted price range, you have to make a higher cash deposit. In most cases, it is better to opt for a home whose price is within the specified range or lower. This will allow you to reduce your first down payment and subsequent monthly payments.
Lenders will calculate the balance of cash in your account after you make your down payment and complete the closing process. This is an important factor that many first-time home buyers neglect. Your cash reserves can come from your bank account balance, dividend payments and the value of stocks, bonds and retirement accounts. Most lenders will see you as a lower risk client if you still have a substantial amount of liquid assets after you pay the closing costs.
Closing costs include a variety of fees that you pay just once. For example, you have to pay for your loan application, credit report, home appraisal and for title insurance. You can estimate the closing costs as four percent of your home’s price. Your lender is usually required to provide a detailed estimate of all your closing costs while preparing your mortgage approval.