Do you qualify for a mortgage?
Lending institutions that will decide on your mortgage application will look at a variety of factors, such as your employment record, the number of credit cards you have and your credit record, which is why you should start the process by requesting a copy of your credit report from a credit rating agency. The three basic numerical indicators taken into account are:
- Housing expense ratio or housing ratio that is a percentage of your gross monthly income you are going to spend on your mortgage payment and other housing expenses such as mortgage insurance, property taxes and hazard insurance. This figure had better be 28% or lower.
- Total expense ratio or total-obligation ratio, total existing debt service obligations of the borrower including credit cards, car loans and child support expressed as a percentage of your monthly income. Lenders will be satisfied with a ratio of 36% or lower.
- Loan-to-value ratio that is determined by the size of the loan divided by the value of the house.
The “seasoning” of the cash reserves in your account is also important: the lender would prefer it if the money used to cover your down payment, closing costs and the first 2 months of mortgage payments have been in your account at least 6 months.
If these numbers do not fit into your situation, do not give up the idea of getting into your dream house:
- The numbers of the first two ratios are usually negotiable upward, but you might have to use a little persuasion, for example, prove an impeccable credit record, or show that you maintained a spotless record of rent payments that made up 40% or more of your monthly income. Lenders can be more lenient in granting credit to someone with ratios of 30% and 32%, with one lower figure offsetting the other that is slightly out of desired range.
- There is a so-called no-ratio plan for those who want to allocate a proportion of their monthly income towards mortgage payments that is significantly above the required 28%.
- Also, if you turn to a broker who has access to a number of credit programs, he can help you find the right option even if you are slightly below the requirements.
- Since few of us can move their monthly income up in one sweep, another thing to do is to try to find a loan with a lower down payment and then use available cash to pay off debt or pay some points to reduce the interest rate.
- An effective way to reduce both expense ratios using spare cash (if you are lucky to have it) is to use a temporary buydown. That means you place cash in an escrow account and later use it to supplement your payments in the early years. On a 2-1 buydown, your payments on a 7% loan will be at a 5% (7%-2%) rate in the first year and 6% (7%-1%) in the second year. With lower payments, you will be able to bring down your expense ratios.
- Sometimes help can come from an unexpected side: the seller. If the seller expects to find few other buyers willing to pay the price, the seller may help the buyer to pay the points or set some cash in an escrow account.
- You can try to persuade the lender that supplemental income like bonuses and overtime that is usually excluded from income calculations is in your case sustainable and will probably continue into the future especially if it existed over a long time period in the past.
- You can consider including a co-borrower, preferably someone with a permanent relationship to you, so that you both share responsibility for the repayment of the loan. In this case it will be the sum of your incomes that will affect the lender’s decision.
Keep in mind that your ability to qualify for a certain loan will always depends on the property value. Those who qualify for purchasing house for $150,000 may not be able to obtain financing for a $350,000-purchase.