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Get Pre-Qualified!
Prequalifying is a process lenders use to give you a quick evaluation of your credit-worthiness and the maximum loan amount for which you are likely to qualify. It is not a pre-approval (which requires careful review and analysis of your financial records), but rather a snapshot of your finances that gives you a ballpark figure to work with.
You need to get pre-qualified for a loan (unless you are one of the lucky ones who can pay cash for the full purchase price). What banks want to know before they will lend you money to buy is a home is simple:
- Are you a good credit risk?
- Do you have a job or income to pay the mortgage?
- Do you have funds for a down payment and closing costs?
- Or will you need a gift, grant or loan for down payment and closing costs; or seller contribution to help out with your closing costs?
How Much Can You Afford?
In general, experts say you can afford a home that costs about 2½ times your yearly income. However, different loan products and types have different guidelines for determining your maximum loan amount and housing payment. (See Step 5 Financing Your Home)
28/36 Ratios
Lenders offering conventional loans (loans not backed by the government) don't want you to take out a loan you can't afford. Generally, the lender won't allow you to spend more than 28 percent of your gross income on home loan payments. Also, they usually won't allow you to pay more than 36 percent of your gross monthly income toward all your long-term debts combined, including your home loan payment, car and student loans, credit card payments, day-care costs, child support and alimony.
31/43 Ratios
The federal government also guarantees certain loans made by private lenders. Uncle Sam want to encourage home ownership, so the Federal Housing Administration (FHA) offers relaxed guidelines that let people with higher debt ratios and smaller down payments qualify for loans. With an FHA loan you can spend a higher percentage of your income for housing and still get a loan. Your home payment may be as high as 31 percent of your income, and your monthly debt payments (including your home payment) can be as high as 43 percent of your income.
What You Can Afford vs. Your Comfort Payment
Keep in mind that you may qualify for more than you feel comfortable paying. You don’t need to spend as much as a loan officer says you can afford, but getting prequalified lets you know the maximum amount you can spend for a home payment. Don’t feel pressured to over-extend yourself and become "house poor."
Are You a Good Credit Risk?
Before a bank, mortgage company or credit union will lend you money to purchase a home, they are going to want to know if you are a good credit risk.
- Have you paid your bills on time? Your credit score may vary depending on if you always, sometimes, or never pay your bills on time.
- How much outstanding debt do you have? Many credit-scoring models evaluate the amount of debt you have compared to your credit limits. If you’re actual debt is equal or near your credit limit, this will likely have a negative effect on your credit score.
- How long have you had credit? The longer you have had credit and proven your ability to pay the better your credit score.
- How often do you apply for credit? Many scoring models consider whether you have applied for credit recently by looking at inquires on your credit report. However, you score will not be penalized if you’re hunting for an auto loan or a mortgage within a short time frame.
- Have you ever declared bankruptcy? If you declared bankruptcy more than two years ago, you may still qualify for a loan. But, you will need to prove that you have since established good credit. To establish credit, use your credit cards and pay the bills on time. It is ironic, but true, that lenders would rather have you prove you can go into debt and pay if off on time, than see you pay everything in cash.
- Have you had a property foreclosed upon or given deed-in-lieu thereof? If you’ve had a foreclosure or given deed-in-lieu of foreclosure ("friendly foreclosure") in the past 3 to 7 years, you may still qualify for a loan. (See below Buying Again After a Foreclosure)
- Have you had a successful short sale? A short sale is one way to avoid foreclosure. If you owe more on the home than its value, your lender may agree to accept less than what is owed on the mortgage, allowing a "short" sale. Unlike a foreclosure or bankruptcy, it’s not reported on a person’s credit history and it’s not a question asked on your loan application. (See below Buying Again After a Short Sale)
You will need a credit report to answer these questions. A lender or loan officer can pull your credit report for a small fee; so can a non-profit agency that provides counseling for first-time home-buyers.
Do You Have Stable Employment or Income?
- You must have a steady income and your current or future employer will have to confirm the amount of your income and verify that they expect to employ you long term.
- If you are self-employed or paid on straight commission, you must verify that you’ve had a steady income for two to three years running. You must supply tax returns and profit/loss statements for these years.
Buying Again After a Foreclosure
With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.
If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.
Buying Again After a Short Sale
If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. Finding a lender who will fund that kind of loan may be very difficult. If you are current on your mortgage for the 12 months preceding the short sale, you can qualify for an FHA loan immediately as well.
If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence. The wait for FHA is 3 years. However, lenders may make exceptions for borrowers in default at the time of short sale if the default was due to circumstances beyond the borrower's control (such as death of a primary wage earner, long term uninsured illness, etc.); and the credit report reflects satisfactory credit prior to the circumstances (beyond the borrower's control) that caused the default.
Borrowers who pursued a short sale agreement on their principal residence to take advantage of declining market conditions and purchase a similar or superior property within a reasonable commuting distance are not eligible for a new FHA insured mortgage.
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Mavrik Realty is not engaged in the practice of law nor gives legal advice. It is strongly recommended that you seek appropriate professional counsel regarding your rights and responsibilities as a homebuyer and homeowner.
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