How often have you looked at a beautiful home and wondered if you had a swimming pool full of money, you would have bought it? Almost every individual has had this thought occur at least once.
Buying a home is an exciting journey. However, it is financially draining because most individuals can’t buy a home without a loan. But, applying for a mortgage can be nerve-wracking. There may be numerous questions running in your mind.
Fortunately, to answer all these questions, financial institutions like Valley Strong Credit Union offer financial literacy centers along with numerous home loan programs. But if you still have doubts, you can refer to the article below to find answers to a few of your queries.
Who are First Time Home Buyers?
According to the U.S. Department of Housing and Urban Development, the following are the requirements of a first-time home buyer:
- The individual has not owned a principal residence in the past three years
- Is a single parent who has owned a house with a former spouse while they were married
- The individual is a displaced homemaker and has only owned a house with a spouse
- The individual has only owned a residence during their lifetime which was not permanently affixed to a foundation
- An individual has only owned a property that did not comply with building codes.
Generally, these criteria qualify you for a first-time home buyer loan. However, the considerations may also vary depending on the lender, program type, and loan amount you are applying for. Let us look at other criteria that qualify you for a mortgage.
What Do Lenders Look For?
The eligibility criteria for a loan will vary from lender to lender. But there are some common factors that every lender typically looks for before approving a loan:
A good credit score:
The number that qualifies for a good credit score will vary from lender to lender. But in general terms, anything above 620 is considered a good credit score.
There are various housing loans backed by the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the Department of Veterans Affairs (VA) that require a lower credit score.
So don’t be disheartened if you have a low credit score. You can always look for alternative lenders that match your criteria.
However, you must remember that the higher the credit score, the lower the interest rate. Therefore, if you are planning to buy a home, it is better to start improving your score by paying off your bills on time and reducing your debts.
Debt to income ratio:
The debt-to-income ratio is the ratio between your monthly payable debt and income. A DTI ratio below 50% is considered a good number to be eligible for a home loan, and a ratio below 43% is considered excellent.
Additionally, lenders will also check that your housing expense, which includes your mortgage, insurance, and property tax, doesn’t exceed 28% of your monthly gross income. Therefore, ensure you have calculated your DTI ratio before applying for a loan.
Before your loan is approved, the lender needs to ensure that you can repay the loan on time. For this, they will look at your verifiable income. Before approving the loan, they may ask you for proof of consistent income and employment, tax returns, and the 1099 form.
They also consider stocks, bonds, and other properties that you can withdraw in case of a financial emergency as verifiable income.
Therefore, it is important for you to have all these documents handy before applying for the loan.
What your down payment will be will depend on the lender. It generally varies from lender to lender. But if you talk about a general amount, the down payment is usually 3 percent of the total loan value.
Also, the more down payment you put, the lower the risk to the lender. Moreover, it will also lower the loan-to-value ratio, which is appealing to lenders.
Your dream of owning a home can become a reality if you consider the criteria mentioned above. However, remember that these criteria may vary depending on the financial institutions. For instance, a credit union and commercial bank will have their own unique requirements for loan approval. Therefore, before applying for a loan, please look at their specifications to avoid any hassles later.