A home purchase is the biggest investment that most people are likely to make in their entire lives. In a vast majority of cases, those looking to buy a home need to first take out a home loan or a mortgage in order to make the purchase. Until about three years ago, acquiring such home loans used to be a relatively straightforward procedure for most individuals with decent credit and little to no down payment. The credit crunch of 2008 and the economic recession of the past few years however have drastically changed the circumstances for obtaining a home loan. Consequently, first time home buyers and others who are looking to secure a mortgage in order to purchase a home need to keep several important considerations in mind. Here are some tips that prospective purchasers need to keep in mind when shopping around for a home loan.
The most important factor that a lender looks at when considering a loan application is the applicant’s credit history. Lenders want to make sure that any individual they are extending a loan to is reliable and has a history of repaying debts on time. Individuals who have a history of late, or missed payments on their credit cards or other financial obligations are unlikely to receive loans, especially these days. In most cases, individuals with credit scores of less than 650 will find it extremely hard to secure a home mortgage. Those who have filed for bankruptcies, in particular, will find it next to impossible to secure conventional home financing. So, before making a loan application, individuals need to pull their credit report and make sure that it does not contain any recent negative comments, or reports. If there are any reports that are incorrect, it is best to attempt to correct them with the credit bureaus before applying for a mortgage.
Large credit balances are another red flag as far as lenders are concerned. While it is okay for individuals to have outstanding debt, a lot depends on what kind of debt it is. For instance, student loans, or automobile loans are considered okay, but large amounts of revolving debt, such as credit card debt is a bad thing. So, before making a loan application, it is a good idea to pay off credit card balances and clearing revolving loans as much as possible. Importantly, while debt by itself is not a bad thing, lenders get concerned if the ratio of debt to available credit is very high. In other words, the closer an individual is to maxing out their credit, the more concerned lenders become. Here again, the best tip for potential borrowers is to pay off debt as much as possible before applying for a loan.
In addition to such considerations, those who are planning to apply for a home loan also need to keep in mind that the rules governing such loans have gotten a whole lot stricter in the past one year. These days, in order to qualify for a mortgage, individuals need to have a higher credit score than previously, and in most cases must be able to put down between 10 percent and 20 percent of the purchase price as down payment. Individuals with poor credit scores or those with negative comments on the credit scores typically also have to wait for longer periods of time than before, for banks to consider their applications. Additionally, mortgage applications these days are required to show proof of regular employment and proof of their ability to repay their loans.
To determine how much loan an individual is eligible for, banks typically consider annual house hold income. They then subtract all monthly obligations such as payments towards automobile loans and student loans to arrive at an estimate of the available resources. Federal guidelines require banks to ensure that monthly repayments on any home loans they make available cannot exceed between 26 percent and 30 percent of gross income before taxes.