Reality has returned to the US real estate market, but since people still need homes it is a great time to revisit the basics for getting approved for a mortgage. It is not possible any longer to qualify for that home mortgage just by showing you can fog a mirror. Future homeowners as well as lenders will be going back to the basics of how loans were approved for the foreseeable future. So what are the basics of a loan application, anyway.
Lenders follow guidelines provided by Fannie Mae and Freddie Mac. 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 calculated using a computer model known as the FICO score. The FICO model is based on credit history.
Your credit history consists of information collected by three 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. Information from banks and credit card companies is also collected and stored in your credit history. Finally, there is also information that can be found in public records such as court filings and property records.
The types and amounts of data collected in your credit history are extensive. It might include every single charge card, loan, or any other form of credit you have had. Regarding loans, there will be the loan amounts, the history of payments and how much is currently owed.
An extensive amount of credit data is maintained by these credit history providers. Thankfully, after seven years, the credit history providers are required by law to remove negative information upon request. All of this information factors into your FICO score with is a critical element that a lender will be interested in. Even before the mortgage industry went crazy with loans to many that were clearly unqualified, you would typically need a minimum score of 660 to be perceived as a good credit risk. If you are told that you need a higher score to qualify for a mortgage at a favorable rate, don’t be surprised, given the current credit crisis. Because of this, it is always a good idea to be working constantly to improve your FICO score. To improve your FICO score, it is easy to find help to get rid of credit card debt.
Provable Income
Next in the loan evaluation is the need to prove your income. To prove your income, simply have your W-2s and your tax returns handy for the past two years, as well as the last two paycheck stubs.
This is easy to prove for anyone with who has had a steady job. A bit more challenging might be proof of income if you are self-employed or if you own more than 25% of the business that you derive your income from. In these cases, you can typically show your tax returns for the past two years indicating your business income.
The Property
Next in the approval process is the property you are interested in. The property you are purchasing is the collateral that is used for the loan. Because of this, the lender must assess the value of the home in the event that the lender must 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.
The value of the home is assessed as an outcome of an appraisal. The assessment of the property’s value is determined by commonly accepted methods. This is accomplished by a professional with the lender or one that is an independent consultant. An analysis of homes nearby the property being purchased is the more common approach for single-family homes. The analysis involves comparing the attributes of the home being appraised with other homes in the same neighborhood that have recently sold. 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 demonstrates that the money was not recently deposited into your account. This will assure the lender that you did not simply use a loan from some other source to use as the down payment. 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, for example, with relatives helping with 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 are the basics for qualifying for a mortgage loan. The requirements for getting qualified for a mortgage have changed back to the standards that were in place from years back. But, with a property that is within your financial qualifications, you should be able with a little patience to get the loan that 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.