When searching for a house, whether in the buyer’s or seller’s market, you’ll want to purchase some as soon as you come across the right one. However, it’s not always that simple, and numerous financial issues will determine whether you’d be able to buy a house or pay for the monthly mortgage fees. Understanding these beforehand can help you make better decisions and streamline the mortgage approval process—giving you the home you want in no time. Before agreeing to a home loan to purchase a new house, make sure you’ve covered the financial prerequisites below.
Have Sufficient Income
When buying a home and applying for mortgages, you need to show your lender that you have adequate income to pay for your mortgage payments as they come. All lenders have different standards, but most use the same methods to develop a qualifying ratio that borrowers need to achieve before they approve your loan applications. Acceptable loan rates are between 26% and 29% of your monthly income.
Provide Required Financial Documentation
Ensuring you have all your documents in a row before applying for mortgages can help the process go smoothly. Insufficient documentation can delay or stop the loan approval process entirely if you don’t take care of it. So, you need to determine what you need to bring. Lenders typically have checklists of required documents to back your loan applications, depending on your income situation.
If you’re starting with a pre-approval, ensure that the lender asks for all documentation processes since conducting without one is inherently useless. You may miss something that could result in your loan application, getting declined later on.
Have a ‘Good’ Debt-to-Income Ratio
When choosing a home, it’s crucial to be realistic about what you can and can’t afford. You can determine this by adding your monthly debt payments and dividing those figures by your gross income every month. Most banks would use debt-to-income ratio results to see if borrowers can afford to buy a home. Generally, debt-to-income ratios can’t exceed 43%.
However, keep in mind that though banks and lenders feel you can afford a specific mortgage payment doesn’t mean you can. For instance, if the bank doesn’t know you have five children or aging parents that you’re currently taking for, they may approve your loans. That’s why it’s vital to have candid conversations about your monthly payments with your mortgage team.
Have an Acceptable Credit Score
Your credit score reflects your capabilities of replaying your debts. Maxing out your credit cards and paying your bills late can hinder your chances of getting a mortgage on your dream home. If you have a bad credit score or don’t have any credit history at all, you won’t be able to qualify for a mortgage. Credit scores provide the bank insight into your ability to pay monthly bills and how much overall debt could affect mortgage payments over time. Generally, FHA provides financing options to borrowers with credit scores as low as 500, but many private lenders have their specific requirements. That’s why it’ll be a challenge to find a lender who’d agree to work with a borrower with a credit score of less than 640.
Have Sufficient Down Payment
Before signing any contracts, make sure to have enough funds saved to place on your soon-to-be-home. That’s because your dream of becoming a homeowner can get thrown out of the window if you can’t give the appropriate amount of money for the down payment since lenders have tightened homeownership requirements in recent years. Generally, most loan programs, including the Federal Housing Administration (FHA) mortgage, require a down payment of at least 3.5% of the home’s selling price.
Although people got away with acquiring homes without paying any down payment in the past, that’s a less likely scenario today as most banks are limiting the risks of borrowers not paying fees or “defaulting.” So, before purchasing your dream house, ensure you have the financial prerequisites mentioned processed before going through the mortgage approval process.