In order to avoid the perception of bias (based on discrimination) most banks and lenders these days use creditworthiness to determine if you qualify for a home loan. Of course, that doesn't mean having a good credit score automatically gets you a loan. It is, in fact, a big piece of the puzzle, but to get a totally clear approval you will need several other things in order as well. Here they are:
TOTAL DEBT CANNOT BE TOO EXCESSIVE
When a loan officer runs your information to get you pre-approved, one of the first things they get from your credit report are your total debts and anything else you are obligated to pay each month. They then factor this with your proposed monthly PITI payment (Principle, Interest, Taxes, Insurance) to get what is known as the "Debt-To-Income" ratio. This ratio represents how much you will be paying each month compared to how much money you actually bring in. Your total payments (including credit cards, student loans, car payments etc.) should not exceed more than thirty-six percent of your income.
APPRAISAL
When you get a loan, the note itself is secured by the actual property you buy. This means that if you don't pay your mortgage the bank can foreclose on you. In order to insure that the house is actually worth what you paid, the bank will order an accurate appraisal, which insures to them that they can again sell the property for the same price if this happens.
RESERVES
Lenders will often look at how much money you have in your bank account at the time you are requesting a home loan. This shows to them that you can still afford to make a payment if you end up losing your job or not making any money in a particular month. Reserves can include retirement funds or even a 401k savings plan.
PMI
PMI, which is Private Mortgage Insurance, protects the lender in case you default. This means that a portion of your monthly payment will go directly to the bank as insurance. In essence it really doesn't help you at all, and you can't ever get it back. Luckily, though, PMI goes away when you reach 20% of your total principle. (PMI is not included in your loan if you put at least 20% down)
DOWN PAYMENT
You can't make a down payment for a home loan with someone else's money, a credit card, or another loan. If you are interested in doing an FHA loan, you are guaranteed to pay at least 3.5% of the sales price as a down payment. So if you are looking to get a mortgage for $100,000 you can expect to need at least $3500 to close. That being said, there are also other closing costs that you can expect to bring as well. The point being, don't expect to get a mortgage for free these days, because it just isn't going to happen.
GOOD OVERALL CREDIT (FICO SCORE)
As mentioned earlier, the most important thing to consider when getting pre-approved for a loan is your credit score. A high FICO score will entitle you to the lowest rates, a mid level score will entitle you to average rates and a poor score will disqualify you from getting a mortgage at all in many cases. Don't worry though, as credit repair specialists can help you out to get your score up in most cases.
Lenders will verify everything aforementioned, including a re-verification of your employment before they allow you to close. It all may seem a little excessive, but it's just what happens and there is no way around it unless you have the capability to pay for the whole house in cash.
So, if you have any questions about getting pre-approved or need information about getting your credit score up legitimately, don't hesitate to CONTACT US and we will get back to you as soon as possible.
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