The process of buying a home can be an extremely confusing one, especially when dealing with mortgages and home loans. Home loans in the United States are typically fixed-rate, meaning that the interest rate remains fixed for the life of the loan. Although the interest-rate remains fixed, other costs can increase, such as property taxes.
Qualification for a home loan generally depends upon the lender or broker that is being used. The lender will look at your credit score and employment. A bad credit score can disqualify you from a loan because it is proof that, in the past, bills have not been paid on time. Lenders generally look for applicants to have had steady employment for at least two years before their application.
The lender also looks for an applicant’s gross income. This income is put into a formula to determine how large of a loan should be granted. The typical rule of thumb is that a monthly housing payment should not exceed 28% of your gross monthly income. This 28% must cover all parts of the mortgage, including the principal, taxes, insurance, and interest. An applicant with a good credit score may be able to get a loan for 30-40% of their gross income, depending upon the lender.
The first step in applying for a home loan is to get pre-qualified. This is relatively easy and can even be completed on most banking websites as it just requires an applicant’s name, Social Security Number, current address, authorization to access your credit scores, and credit card information to pay the processing fee. Once pre-qualified, the full mortgage loan application must be completed and W-2 forms are collected, as well as pay check stubs, bank statements, student loans, and employment history.
Before sitting down with a bank to discuss home loans, it is advised that you try and figure out the amount that you would be comfortable paying every month. Keep in mind that it is typically advised that a debt-to income ratio does not exceed 36%. To determine your ratio, multiply your income by .36 and divide that number by 12. The solution is the maximum mortgage payments that should be made per month. For the per year number, do not divide by 12.
