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How to Qualify For a Home Loan
A Home of My Own
The Big Four
This is a timely topic because housing prices have certainly dropped during the world wide recession. What are the main things that banks look for? There are four main criteria:
- An adequate down payment. This could be as little as 3% and as much as 20%.
- Two years of consistent employment with the same employer or same profession.
- Two or three times more income than your required monthly payment (mortgage).
- Good to excellent credit. The experts say that you should be in the mid 600s range to qualify.
Best Case Scenario
In a perfect world, you get approved and then go shopping. It rarely works out this way, however!
In our scenario, Mr. and Mrs. Public get pre approved credit at their bank. Because they have excellent credit, they get a generous home loan with low interest rates. Pre-approved credit is the best kind of credit you can get, because you are walking around with a promissory note in hand, if you will. You know you can buy within the approved amount, which is a great feeling.
Many times, people find a home that they adore. It suits their purposes, it's in the right location for school, work and social reasons. Then they go to the bank to see what types of loans are available.
Rent or Own
A classic bank is where most people start to apply. The rule of thumb is to apply two or three times for a loan. Most people end up paying more interest than they need to. Like a job offer, it's easy to settle for less. Be prepared to bargain, because a home loan is paid over a long period of time.
Most banks follow the Big Four listed above. They want to find a textbook lender so the risk of default is low to non-existent.
If you have good credit, you may easily qualify for a home loan. But even if you do pre-qualify, shop around as a matter of principle and see if you can beat the original offer.
Your credit union may offer the best interest rates and repayment options. If your company has membership in a Credit Union, inquire and apply. Credit Unions are traditionally a friendlier place to conduct banking business because it's structured as a club of co-investors and lenders, usually linked by a common industry (like teaching, fire fighting, etc). This alone lessens the "us versus them" mentality. You will still have to qualify, and will most likely have to pay with payroll deductions taken directly from your check, but the interest rate will most likely be very competitive.
"Bad Credit" lenders
These lenders exist for a reason - lots of people have bad credit. Some call them predatory, or even "Loan Sharks" but that's not necessarily true. Like all businesses, supply and demand. Due to the economic recession, many have lost their jobs and had to default on their credit, especially when the loan was higher than the house was worth. Unexpected illnesses can also get a person a bad credit history.
Naturally, with high risk clients, these firms charge a higher interest rate, fees and more fees, and a long term repayment plan. However, they provide an opportunity to make a bad credit good with due diligence. With time, the fees and interest should go down (since the risk has been reduced of default). If nothing else, it is something to consider. Most people feel it is better to buy (invest in a home) than rent - basically throwing away money every month.
Standard of Living
- The Cities Where A Paycheck Stretches The Furthest - Forbes
In Los Angeles or New York, you may be able to earn a high salary, but high prices will eat it up. These are the cities with the best balance between wages and cost of living.
Happy Home Owner?
This describes my situation:
Rule of Thumb
A Helping Hand
Mortgage broker - get an agent
Just like an actor without a role, you can get a mortgage broker to help get you into the world of home ownership. He or she is an expert in lending institutions, people who know and how to pass the gamut from applying for a loan to getting a mortgage. They will charge a fee, but sometimes it pays to have a guide in the jungle of home ownership.
Pride of Ownership
Where there is a Will...
This may not look like a loan but it is. You are lending from the seller and paying him back over a predetermined time frame.
Perfectly legal, this is an option that will probably be possible if the house being sold is not being used to purchase another. Supposing the owner is not in a huge rush for the money, a document may be drawn up, notarized and be held legally binding.
According to the norm, the buyer and seller sign the document that a certain amount of money will be paid - let's say 5 payments of $20,000 to keep things simple - and usually makes the first payment when the document is drafted. There will most likely be a stipulated time frame - five or ten years for example, that the final payment must be made. There is more than one way to go, and this is an option in a small percentage of cases. Nevertheless, it is one to consider if the owner is prepared to wait.