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Get approved for a home loan

by www-melloproperties-comSeptember 17, 2018

Home loans can seem complicated but they are not. Our team can help guide you through the entire process.

Many of our clients start asking themselves the same questions:

  • What is the minimum credit score?
  • How much is the down payment?
  • Are there grants for first-time home buyers?

One of the great joys we have is helping people develop a roadmap to their new home. Home ownership is like any other goal, you have to know what the requirements are, and then prepare yourself to meet those requirements.

If you are going to a bank or mortgage company, both will have general guidelines on your credit score, debt-to-income, employment, and funds for a down payment and closing cost.

The difference between a bank and a mortgage company is their focus. Banks have many products and services: checking accounts, insurance, retirement investments, commercial loans, and mortgages. Mortgage companies solely focus on home loans; they specialize in home-ownership.

Regardless of the type of loan you move forward with, the metrics finance companies use to measure what you qualify for is straight-forward.

Below are keys things to know about home loans:

Credit Score: Your credit score is used to show your track history of paying your debts on time. In addition, it shows how much of your credit availability you use. For example, if you have a credit card and it is close to maxed out, that does not look good on a mortgage application. The best practice is to use less than 30% of your total credit availability. Keep low balances and paying on time is the best habit to develop.

Debt-to-income (DTI): Your debt-to-income reflects the percentage of income you have going to pay for your expenses every month. Basically, out of the 100% income you have, what percentage goes to monthly expenses?

Here is an example: Say you make $5,000 monthly (before taxes) and your expenses are $1,200 monthly. You would like to purchase a home with a $1,300 monthly payment.

Here is how you calculate your debt-to-income:

Debt-to-income = Total debt divided by total income

Total Debt: $1,200 (monthly expenses) + $1,300 (proposed house payment) = $2,500.00

Debt-to-income = Total debt divided by total income

Debt-to-income: $2,500 / $5,000 = 50% DTI

This means 50% of your income every month goes to debt. Use this formula to calculate your own DTI.

Employment History: Employment history is important, it shows you have a history of earning income. In addition, your trend of income. Is it going up or down? Finance companies want to see your income increase. Self-employed or employed, finance companies want to see at least 2+ years of work history. Also, you do not have to stay with the same employer for the full 2 years, you simply have to be in the same line of work for the 2 years.

College Graduates: If you are a recent college graduate and you just started working in your field of study, you can use your schooling as work history.

Cash to close (FUNDS): We always tell our clients, never go shopping without your wallet. Buying a home requires a down-payment and a closing cost. There are grants available for the down-payment of your home, if you message us, we can guide you through your options.

Your down payment goes towards your loan. For example, if you are buying a home for $150,000 and you move forward with a conventional loan (5% down payment), your loan would be the following.

  • Sales price: $150,000
  • Down payment (5%): $7,500
  • Loan Amount: $142,500

Closing Cost (FUNDS): Your closing cost is a combination of things. The cost of doing the loan (what finance company charges you), property taxes, property insurance, and mortgage insurance. Depending on what property you want will determine your total closing cost.

Congratulations! If you made it this far, you are one step closer to home-ownership. There is so much more to learn about mortgages and we are here to answer any and all questions.

Alan Lakein says “Failing to plan is planning to fail.” Remember, home-ownership is like any other goal, you have to know what the requirements are, and then prepare yourself to meet those requirements.

For all things residential real estate, think Mello Properties!

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