Buying a home can be one of the most rewarding achievements in your life. However, before you start looking for your dream home, it may help to first become familiar with the characteristics lenders are looking for in borrowers. Below is a list of the major requirements that lenders focus on when seeing if you qualify for a loan:
While a down payment is not always required, it reduces the loan-to-value (LTV) ratio, allowing lenders to see that the value of the house is greater than the loan that you are taking out. Lenders calculate your LTV ratio by dividing the amount you are asking to borrow by the value of the home you want to buy or refinance. An LTV ratio greater than 80% usually requires monthly private mortgage insurance (PMI). Therefore it's a good idea to have 20% of the value of your dream home at your disposal before you look to buy. But if you have less than 20% down, there are still many loan options available – with and without monthly mortgage insurance. Also, keep in mind that mortgage lenders will want verifiable proof that these funds exist, so have your bank statement.
Lenders generally calculate that your home ownership cost, as well as other debts, does not exceed 43% of your gross monthly income. Therefore, if you have student or car loans with large monthly payments, it may be more difficult to qualify for a home loan. In this case, you may consider adding a co-borrower to your loan. Or many government-sponsored loans allow for debt-to-income ratios greater than 50%.
A buyer's credit score has a major impact on the interest rate and loan products available. Typically a credit score of 720 or higher should earn you the most favorable interest rate when borrowing. It's a good idea to review your credit report early in the pre-approval process to ensure there are no mistakes, or unknown issues. There are three primary credit bureaus: Experian, Equifax and TransUnion. Every lender will use, not the highest or lowest, but your middle credit score. An experienced loan officer will review and alert you to any potential problems. Many times, credit scores can be improved and inaccuracies corrected fairly easily.
Lenders will look more favorably at someone who has kept the same job for two or more years than someone who has changed positions frequently. Most lenders require two years of steady employment – especially if self-employed. However, as a Direct Lender, we are often able to approve buyers with only one year employment and Federal Returns.