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. No longer will a mortgage lender approve a loan just because the borrower 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. Let’s review the basics of a successful loan application.
Lenders follow guidelines established by the Federal National Mortgage Association (commonly known as Fannie Mae) and by Freddie Mac. Additionally, lenders will often add their own guidelines as well – especially in the current economy. 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.
This history is collected and maintained by three credit history providers: Equifax, TransUnion, and Experian. Your credit history consists of personal information such as your address, you phone number, your date of birth, your Social Security number and much more. Not only personal information, but information pertaining to banks and credit card companies is found in your credit history. Lastly will be found data that is obtained from public sources which includes property records and any court filings.
The types and amounts of data collected in your credit history are extensive. It will include the history every credit card or loan that you have had. Included is the loan amount, the history of payments, as well as the amount currently owed.
The main point is that a credit history maintains an extensive amount of credit information. Thankfully, after seven years, the credit history providers are required by law to remove negative information upon request. From this information, the FICO calculation is made to derive a score that will become a primary factor for your lender. 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, don't be surprised to see that minimum score much higher - at least until the current credit crisis settles out. Because of this, constant work to improve your FICO score is always a good idea. To improve your FICO score, there are many websites to help you to reduce your credit card debt.
Provable Income
Next is your provable income, which is essential for the evaluation of the loan. 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. The proof of income is similar for those that own their own business or that own over 25% of the business they work for. In these instances, you will generally need a copy of your tax returns that indicates your business income.
The Property
Next is the actual property in the approval process. After all, the property itself becomes the 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. If this happened, the lender would need to sell the property, so assuring that it is worth the amount of the loan 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 can be accomplished by either an independent professional, or with a staff member of the lender that is training in appraisals. For single family properties, a common approach is an analysis of similar homes in the vicinity of the property that is being purchased. The analysis involves comparing the attributes of the home being appraised with other homes in the same neighborhood that have recently sold. An assessment of differences between recently sold homes and the one being appraised is performed to determine the value of the home.
The Down Payment
The specific amount required for the down payment on a home is dependent on the value of the mortgage, your income, interest rates, plus 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. The lender will need to be assured that the funds for the down payment did not come from another loan. This includes drawing large sums from one or more credit card accounts and depositing the funds in 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. If so, you can simply have the person making the gift to compose a letter stating that they have given you the money to use for this purpose.
Conclusion
These are the basics for qualifying for a mortgage loan. Certainly the bar has been raised one who can qualify and who cannot. 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 homes for sale in Denton, be sure to look me up.
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