Do you qualify for a mortgage?

Most lenders require you to complete a mortgage application to determine if you qualify. The application is fairly standard from lender to lender and ask for following information: Your gross income, the value of your assets and your expenses and debts. The information you provide on your application determines whether you qualify for a loan and how much you can borrow. Lenders use what is known as a debt to income ratio. Lenders usually require that your housing costs do not exceed 28% of your family gross income. So the total mortgage payment including principal, interest, taxes and insurance (PITI) divided by your total gross income should be 28% or less. Also, the total mortgage payment, any car payments, credit card and any other loan payments divided by your total gross income, should not be more than 36% of gross monthly income. These two percentage ratios in mortgage industry is known as front and back ratio (28:36). Government insured mortgages such as FHA and VA loans have higher ratios (usually 29:41).

Applying for a Mortgage:
Traditionally, you find a home you wanted and then applied for a mortgage. But the best way to approach with buying a home is to first prequalify for a mortgage. That means a lender tells you not only whether you'll be approved to borrow, but also the size of the loan. So you know in advance how much of a house you can spend on after adding up the down payment.

Applying for a mortgage can be  both a stressful and exciting time for you. How do you make it less stressful? By understanding the process of what lenders are looking for in your mortgage application. There are three main things lenders look for when approving you for a mortgage: Your credit report, your credit score and your ability to pay (your income). A potential lender is looking for a few key things while deciding whether or not to approve you for a mortgage. The most important thing that they will look at is your credit history. When a bank considers lending you money they want to know if you will be a good risk for them. The most accurate indicator of this ability is what you've done in the past. Not only will they look at the specifics of your credit history but they will look very critically at your Credit Score. Your Credit Score is the method credit bureaus summarize what is on your credit report.

The first thing you should do before applying for a mortgage or any loan is get your credit report. For years the banks would never tell you your credit score. But no one should know more about your finances than you. Getting your credit report will allow you to correct any mistakes that appear and possibly get legitimate bad marks removed. It is very important to clean up your credit as much as possible before applying for a mortgage. The better your credit is, the less it will cost you to get a mortgage. You should get a "merged" credit report, which is a report from each of the Big Three credit bureaus, before applying for a mortgage because the bank will get your credit report from all three credit bureaus. You can order a 3-BUREAU CREDIT REPORT from CreditReporting.com.

Do you have the ability to pay?
This is the most important question a bank wants to answer while reviewing your application you want to give them as many reasons as possible to say, "Yes." One of the best things you can do is reduce the amount of all of your debts. Pay off all of your credit card balances, lay low for a while, and keep as few loans as possible. You may have to delay your application by a few months in order to reduce your debt load but it will be worth it in the long run. In order to avoid delays, you should start this process well in advance of your intended home purchase.

Sometimes when trying to get a mortgage on a new construction home, the builder will have an affiliation with a certain lender, sometimes more than one. This lender is usually the one which is handling the construction financing for the builder. It may be beneficial for you to apply with the recommended lender because sometimes they will give you favorable perks and reviews. They may pay closing costs or a share of the closing costs or give you a no points loan. However, it is always a good idea to comparison shop, so you should get a quote from loan comparison such as BestRate.com or E-LOAN to make sure that you get the best deal possible. This site will give you up to 4 mortgage quotes free when you fill out their easy online application. Always check the numbers on the various offers that they come back with. Carefully review these numbers to determine which combination of points and interest rate best satisfies your needs.

How much of a house can you afford?
The answer to this question depends on three things: How much you earn, how much you have saved up or plan to save toward a down payment and closing costs and last but not least, what the current interest rates are.

1. What is median price of a home? The cost of buying is reflected in the median price of a home. This is a point at which half the homes cost less and half cost more. Housing prices raised steadily in 1970's and 1980's. It stabilized in the 90's but housing prices has been climbing rapidly for the past few years.

   Your annual income - When you apply for a mortgage, lenders like to see you meet certain debt-to-income guidelines. The traditional ratio for a conventional lenders (not FHA or VA) is 28:36. What that means is that your housing costs (including mortgage, property taxes, and insurance) do not exceed 28 percent of your gross monthly income, and all of your debt (including your housing costs, any car loans, credit card and any other loan payments) should not be more than 36 percent of gross monthly income. For example, if you earn $48,000, your gross monthly income is $4,000. That means you could spend up to $1,120 (28 percent) on your mortgage, taxes and insurance, and up to $1,440 (36 percent) on all of your debt. Remember that gross income is before taxes, which means your take-home pay is much less. In this case it might be $3,000 in take-home pay, so that $1,120 actually feels more like 37 percent, instead of 28 percent. If you had $1,440 in debts, they would eat up almost half of your take home pay. FHA and VA insured loans have higher ratios for qualifying.
    
2. Down payment and closing costs - The traditional down payment  is 20 percent of the purchased price. But if you are a first time home buyer, you may need to put down only 3 to 5 percent on a home. Some lenders will even do zero-down payment loans. It's a good idea to go to home buying fairs or conventions, you may learn a lot about buying a home and state programs geared toward first time home buyers. In addition to down payment, you might have to come up with about 4 to 6 percent of your purchase price to cover closing costs, like points (1 point is 1 percent of the loan amount) and other fees. If you don't have enough money, you can apply for a no-point, no-fee or also know as no cost loan. Your interest rate will be a little higher buy you can close on your home with very little cash.
    
3. Interest rate - Interest rate is very important in determining how much of a house you can afford because the lower the interest rate, the more you would qualify for a loan. Let's take an example again with a gross income of $1,120 per month. If you take out taxes and insurance of $300, you'll be left with $820 a month for the mortgage. In the 1980's when interest rates were really high (around high teens), you'll probably qualify for only $61,000 in mortgage at 16 percent on 30 year fixed-rate loan. Compare that to today's current environment of 6 percent, which is at 40 year low, you would be able to borrow around $137,000. Use this calculator to find out how much house you can afford.

The commitment letter:
If your mortgage is approved, you'll receive what is known as a commitment letter. It spells out how much you can borrow and how long the offer is good for. It may also state the interest rate, which you can "lock-in". The lock-in guarantees the you a specified interest rate provided the loan closes with the buyer within a set period of time. The lock-in also specifies the number of points to be paid at closing. Otherwise the rate is determined when the final loan documents are approved. If a lender turns you down for a loan, try an another lender. All lenders use the same basic information, but they may evaluate it differently. Commitment letter help you set realistic goals while you're house-hunting, provide the same negotiating ability as a cash buyer, and enable you to move quickly once the perfect home is found.

Next -->> How much of a house can you afford?
 

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