Now that reality has hit the US real estate market is, it would be a good thing to review and be ready for getting qualified for a home loan. You can no longer get that loan just by being able to fog a mirror. So it is back to basics for future homeowners and lenders alike as the requirements will be trending upward for the near-term. What are the basics of a successful loan application, anyway.
Fannie Mae (which in reality is the Federal National Mortgage Association) and Freddie Mac establish guidelines that lenders follow. You may find that lenders have added some guidelines of their own as well due to the more cautious lending markets. The guideline includes your credit score, your income, how much the property is worth, and the down payment.
Credit Score
Your credit score is simply your FICO score which is computed from a specific published formula. Your credit history provides the data for the FICO model.
This history is collected and maintained by three credit history providers: Equifax, TransUnion, and Experian. Your credit history contains all sorts of personal information including your phone number, your past and present addresses, any aliases, your Social Security number, and your date of birth. In addition to personal date, into your credit history is also collected data from banks and credit card lenders. Lastly, information that can be collected from public sources – such as court filings and property records – may be in your credit history.
The information of your loan and credit history will be extensive. Usually you will find some history of every charge card or loan you have had. For each loan, past and present, there is the amount of the loan, the payments history, and how much is currently owed.
The credit history providers maintain vast amounts of personal and credit history data. Thankfully, after seven years, the credit history providers are required by law to remove negative information upon request. All of this information is used to derive your FICO score which will be used by the lender as a key part of their evaluation. Before the mortgage loan industry got crazy in their loan criteria, a minimum score of 660 would be required to be noted as a good credit risk. Now, however, due to the current credit crisis, you can expect to need a higher score to get the best interest rate. This should be an indication that everyone will need to start working to be more aware of, and to improve on, their FICO score. To improve your FICO score, there are many websites to help you to get rid of credit card debt.
Provable Income
The next major part of the guidelines for a mortgage application is providing proof of your income. Your income is provable by showing for the last two years your W-2s and your tax returns, as well as your last two paycheck stubs.
None of this should be a problem for anyone with steady employment for the past two years. If you are self-employed or if the business that pays your income is greater than 25% owned by you, the proof is similar. In these cases, you can typically show your tax returns for the past two years indicating your business income.
The Property
The next major key to the approval is the actual property itself. Don’t forget, the property will become collateral for the loan. So, the lender must assess – for the worse-case analysis – what the value of the property truly is on the outside chance that the lender will need to foreclose on the property. In this case, the lender would then need to sell the property to another owner, so properly assessing the value of the home is essential.
An appraisal of the home is used to determine the property’s value. There are methods for finding the value of a property that are commonly agreed upon. This is done by someone trained as an appraiser – whether on staff with the lender or as an independent professional. For a single family home, usually the appraisal is performed by analyzing similar homes in the vicinity of the property in question. The analysis consists of a comparison of attributes of the home being purchased with similar homes recently purchased in the same neighborhood. Differences in prices vs amenities of recently sold homes and the one being appraised are compared to arrive at the value of the home.
The Down Payment
The specific amount needed for the down payment in the property depends on the value of the loan, your income, the interest rate, and several other factors. Regardless of the amount of the loan, you will need to also provide at least two months of bank statements as a part of the loan process. This is to show that the money did not suddenly appear in your account. This will show to the lender that the money for the down payment did not come from another loan source. This also includes drawing a large amount from a credit card account and using the funds to deposit into your checking account.
It could be that you receive some or all of the funds needed to use for your down payment. This is often the case when relatives chip in with funds to help with a down payment. When this is the case, it is a simple matter of having the relatives write a letter indicating the gift and this is it for the purpose of the down payment.
Conclusion
These, then, are the main points for getting qualified for a loan for a new home. The requirements for getting qualified for a mortgage have changed back to the standards that were in place from years back. But if you have chosen a property that matches your financial qualifications, be patient you should be able to find the loan you need.
I hope you find this helpful and if you are ever looking for Denton, TX homes for sale, be sure to look me up.