Most people require a home mortgage to purchase a house. When borrowers obtain a mortgage loan the real estate is used as collateral to secure the note. Borrowers make monthly installment payments to repay the debt. The majority of home loans are repaid over 30 years; however, 15-year loans are also available.
The first step in obtaining home mortgage loan approval requires borrowers to submit a credit application. Fees typically range between $75 and $300 and paid directly to the lender. Banks obtain borrowers' credit history from the three major credit reporting bureaus including Equifax, Trans Union and Experian.
Mortgage notes are usually borrowers' largest expense, so lenders scrutinize financial records and credit history to determine loan eligibility. Borrowers who have negative credit marks, high balances on credit cards, or low FICO scores are advised to take action to clear credit before applying for a home mortgage loan.
Individuals uncertain of their credit can obtain a copy of their report through various means. Reports can be obtained from each credit bureau or online services such as AnnualCreditReport.com or FreeCreditReport.com. Credit report agencies offering no-charge services only provide a report from one of the three bureaus. In order to check all three agencies, individuals must purchase a credit package.
Those who have concerns about their credit history should obtain a credit report from all three agencies. Not all creditors report information to each agency, so Experian can show information that might not have been reported to Trans Union or Equifax and vice versa.
In addition to reviewing credit history and FICO scores, lenders also look at debt to income ratios. Two types of DTI are used to calculate borrowers' ability to repay the home mortgage loan. The first is referred to as "front ratio" and encompasses expenses associated with the property such as mortgage principal, interest, mortgage insurance, property taxes and homeowner's association fees.
The second DTI is referred to as "back ratio" and encompasses all other recurring debt including credit cards, student loans, automobile loans, and any other outstanding debts. The current ratio is 28/36; meaning 28-percent of income is used to pay front ratio expenses and 36-percent of income is used for back ratio debt.
The total amount of the monthly home mortgage loan payment cannot exceed 28-percent of the borrower's annual gross income. Recurring payments cannot exceed 36-percent. To simplify, for borrowers' to qualify for a home mortgage total debt cannot exceed 64-percent of their income.
Another factor mortgage lenders consider when reviewing home loan applications is their employment status. Borrowers prefer to work with individuals who show a stable job pattern. In today's economy, many people have lost their employment and forced to seek new employment. If they previously held a job for at least two years and have been with the same employer for a minimum of six months, their chances for home mortgage approval are better than a person who changes employers every six months. Individuals who are self-employed must provide a strong track record and provide copies of previous years' tax returns.
Before applying for a home mortgage loan, financial experts recommend taking the following steps:
1. Make certain your finances are in order. The better your finances, the lower your interest rate and monthly payments will be. If you have outstanding debts that would prohibit approval, develop a debt reduction plan before applying for a home mortgage loan.
2. Take time to conduct research and understand what is involved with obtaining a home mortgage loan and what types of loans are available.
3. Shop around for home mortgage loan lenders. Investing in real estate is probably one of the biggest financial decisions you will ever make. Interest rates can vary greatly between lenders. It is important to obtain the lowest interest rate possible because most home mortgage loans include prepayment penalties which can be stiff if borrower's elect to engage in mortgage refinancing at a later time.
If you don't qualify for a home mortgage loan at this time, you might qualify for other types of financing such as rent-to-own properties or seller carry back financing. We invite you to peruse our home mortgage article library to learn more about real estate financing options.