5 Steps – How to Pre-qualify for a Home Loan
There is usually no best time to buy a new house. However, there might be wrong times, especially when the rates are on the higher side. The interest rate is one of the major components to be considered when buying a home. This is so as it determines the cost of the home. Therefore, it is not particularly advised that you wait for a period when the interest rates will be at their lowest. This is so as the factors that determine the interest rates are not controlled by individuals like you and me.
One of the factors that inhibit people from buying a house is the lack of enough money. In this case, it is advised that you ask some financial institutions for a teaser loan. Teaser loans come with a low-interest rate for the first 12 to 36 months. The duration of the initial fixed rate varies depending on the bank.
The first step to obtaining a home mortgage is getting pre-qualified to obtain the loan. This is required regardless of the type of loan you choose. To ensure that you get pre-qualified for any of the many mortgage loans, below are five steps that you should follow.
Choose the right mortgage company
The first of the steps required to obtain a home loan pre-qualification is finding the right mortgage lender. This is very important to the process, without which you cannot go ahead with other steps in the process. Getting a referral need not be difficult as you could ask your friends, neighbors or even real estate agents/brokers. Talk to a couple of lenders and determine who’s looking after your best interest when it comes to securing a mortgage loan.
Pay all accounts on time
It is extremely important to make sure all your outstanding accounts are paid on time in the last 24 months before applying for a home loan. This is so as all your payment details will show up when the lender pulls your credit. You will also be required to document your monthly earnings and total monthly payment. Car payments, minimum monthly payments on your cards, child support and other types of expenses that make up your total monthly payments should be provided.
Determine your debt-to-income ratio
For persons that are familiar with mortgage loans, the term “ratio” will not be new. “Ratio” here tell you if you pre-qualified for a loan or not. If you have the necessary information and you know how to do the calculation, you can arrive at the ratio yourself. However, if you do not know how to get the ratio, you can seek the help of your lender.
To get the ratio, all you need to do is to add all your debts and compare the total to the total sum of your income. There are two ratios that you need to pay attention to: (1) the front-end, and (2) the back-end ratio, respectively.
Front end ratio refers to the number or percentage that corresponds when you divide your gross monthly income by the proposed housing expense. In short, what’s the relation of expected monthly mortgage payments (principal, interest, taxes, and insurance) against your gross monthly income?
For you to get the best mortgages based on interest rates, your front-end ratio must be less than 26%. The chances of getting qualified for a loan are significantly reduced if the ratio is higher than 36.
The back-end ratio refers to all your monthly installments and revolving account payments, plus the proposed housing expense, divided by your gross monthly income. The rule is 45% or less; if you do, then you have a great chance of qualifying for a mortgage. If your back-end ratio exceeds 50%, it will be extremely difficult to qualify for a mortgage.
– Another important step in getting any of the Texas home mortgages is obtaining your credit report. This is usually done by your lender after getting your authorization. The report tries to establish how risky or not it is for the lender to give you a loan to buy a house. The risk associated with the mortgage is established considering various factors.
Some of the factors considered include occupation, the number of years you have spent on your current job, the ratio of balances to available credit lines, and the number of years you have lived at your current address. Other factors to be considered include the number of recent inquiries in the last 12 months, your home ownership status, bankruptcy, foreclosure and slow pays from your past and present history.
The notation for the FICO scores starts from 300 to 850. The higher the credit score, the greater your chances of getting a pre-qualification to get a home loan at a good interest rate.
The final part of getting pre-qualification for a home loan is for your lender to write a pre-qualification letter for you. The letter is to contain a statement of how your initial financial and credit information looks like after going through a series of checks.
The pre-qualification letter will state the maximum amount you’re qualified to borrow, the down payment requirement, the interest rate and term of the loan, among other things.
It is imperative that as a borrower, you get pre-qualified for a mortgage, before starting to look for properties. Not only does it give you a peace of mind knowing you have a maximum amount to work with, it also gives you control over your finances by not going overboard when looking for a house.