Step 1: Find Out How Much You Can Borrow
The first step in obtaining a loan is to determine how much money you can borrow. In case of buying a home, you should determine how much home you can afford even before you begin looking. By answering a few simple questions, we can calculate your buying power, based on standard lender guidelines.
Click here to get Pre-Qualified.
You may also select to get pre-approved for a loan which requires verification of your income, credit report, assets and liabilities. It is recommended that you get pre-approved before you start looking for your new house.
With this pre-approval letter, you can:
- Look for properties within your range.
- Be in a better position when negotiating with the seller (seller knows your loan is already approved).
- Close your loan quicker
More on Pre-Qualification
- LTV and Debt-to-Income Ratios
- FICO™ Credit Score
- Self Employed Borrower
- Source of down payment
LTV and Debt-to-Income Ratios: LTV or Loan-To-Value ratio is the maximum amount of exposure that a lender is willing to accept in financing your purchase. Lenders are usually prepared to lend a higher percentage of the value, even up to 100%, to creditworthy borrowers. Another consideration for improving the maximum amount of loan for a particular borrower is the ratio of monthly debt payments (such as auto and personal loans) to income. Rule of thumb states, your monthly mortgage payments should not exceed 1/3 of your gross monthly income. Therefore, borrowers with high debt-to-income ratio need to pay a higher down payment in order to qualify for a lower LTV ratio.
FICO™ Credit Score: FICO™ Credit Scores are widely used by almost all types of lenders in their credit decision. It is a quantified measure of creditworthiness of an individual. FICO™ scores reflect credit risk of the individual income comparison with that of general population. It is based on a number of factors including past payment history, total amount of borrowing, length of credit history, search for new credit, and type of credit established. When you begin shopping around for a new credit card or a loan, every time when a lender runs your credit report, it adversely effects your credit score. It is, therefore, advisable that you authorize the lender/broker to run your credit report only after you have chosen to apply for a loan through them.
Self Employed Borrowers: Self employed individuals often find that there are greater hurdles to borrowing for them than an employed person. For many conventional lenders, the problem with lending to a self employed person is documenting an applicant’s income. Applicants with jobs can provide lenders with pay stubs, and lenders can verify the information through their employer. In the absence of such verifiable employment records, lenders rely on income tax returns, which they typically require for 2 years.
Source of Down Payment: Lenders expect borrowers to come up with sufficient cash for the down payment and other fees payable by the borrower at the time of funding the loan. Generally, down payment requirements are made with funds the borrowers have saved. If a borrower does not have the required down payment, they may receive “gift funds” from an acceptable donor with a signed letter stating that the gifted funds do not have to be paid back.
Home loans come in many shapes and sizes. Deciding which loan makes the most sense for your financial situation and goals means understanding the benefits of each. Whether you are buying a home or refinancing, there are 2 basic types of home loans. Each Mortgage has their own unique reasons to why you would choose them.
1) Fixed Rate Mortgage
Fixed rate mortgages usually have terms lasting 15 or 30 years. Throughout those years, the interest rate and monthly payments remain the same. You would select this type of loan when you:
• Plan to live in home more than 7 years
• Like the stability of a fixed principal/interest payment
• Don’t want to run the risk of future monthly payment increases
• Think your income and spending will stay the same
2) Adjustable Rate Mortgage
Adjustable Rate Mortgages (often called ARMs) typically last for 15 or 30 years, just like fixed rate mortgages. But during those years, the interest rate on the loan may go up or down. Monthly payments increase or decrease. You would select this type of loan when you:
• Plan to stay in your home less than 5 years
• Don’t mind having your monthly payment periodically change (up or down)
• Comfortable with the risk of possible payment increases in future
• Think your income will probably increase in the future
By carefully considering the above factors and seeking our professional advice, you should be able to select the one loan that matches your present condition as well as your future financial goals.