How does a Mortgage Lender qualify you for a home loan?
How does a Mortgage Lender qualify you for a home loan?
Before mortgage lenders can grant you a loan, they of course would like to make sure you can repay them. Your finances will be examined never before, making this experience quite overwhelming especially for first-timers.
There are many questions and a mountain of papers to fill out and sign. This all occurs before you even know if the house you have your eye on, can be yours.
Mortgage lenders will need to consider your personal finances very carefully before making a decision. They will need to know about your Credit History, Gross income monthly, and down payment.
The mortgage lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support.
According to the FHA, monthly mortgage payments should be no more than 28% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of income.
The Debt-to-Income Ratio Explained
A big part of the mortgage lender’s concern is your debt-to-income ratio. There are two calculations used to determine this number:
Front-End Ratio
This calculation determines how much of your pretax income will go towards your monthly mortgage payment. The mortgage payment figure includes interest, principle, taxes, and insurance and typically should not go over 28% of your gross monthly income.
Annual Salary x 0.28 / 12 (months of the year) = Maximum Housing Expense
Back-End Ratio
This calculation determines the amount of your total gross income that will go to pay all of your other obligations, including the mortgage, other loans, child support, credit card bills, and any other monthly debts. The figure should not exceed more than 41% of your gross income.
Annual Salary x 0.41 / 12 (months of the year) = Maximum Allowable Debt-to-income Ratio
Different lenders will have different requirements for the debt-to-income ratio. For instance, conventional loans — typically a conventional loan from a bank or other mortgage lender — will require no more than 26% to 28% of month gross income for housing costs and not more than 33% to 36% of monthly housing plus debt costs. With an FHA loan, the housing costs should not exceed 29% of the monthly gross income and 41% of the monthly gross income.
Other Factors Considered For A Mortgage Approval
Other factors mortgage lenders will consider in their calculations to qualify you for a mortgage loan include the cost of your real estate taxes, association fees (if any) and homeowners insurance. Property taxes can be determined by talking to your real estate attorney or contacting the local tax office for more information.
Homeowners insurance is a requirement for obtaining a mortgage and an estimate can be acquired from a local insurance agent. Make sure you have an accurate quote from the agency to get the right estimate.
Some areas will require additional coverage for floods and other hazards, depending on the location of the home. Also, if your down payment is less that 20%, you will be asked to obtain mortgage insurance or to take out a piggyback loan in order to reduce the initial loan to 80% of the purchase price.
Before you begin looking or getting all excited about a great house you have found on the market, take some time to get information about prequalifying for a home loan. This may save you a lot of time and trouble when house-hunting.
The fact is, you’ll be better prepared to offer a respectable down payment when you know exactly how much house you can afford. Putting in some research, preparation and time to understand your financial circumstances prior to buying a house will allow you to negotiate a better deal and possibly make the home buying process move along more smoothly.
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