When it comes time to purchase or refinance a home lenders are look for a certain financial profile. Your financial profile should have these things…
There is four things lenders look at when deciding whether not to grant you financing and having a balance of each will score you better terms and an easier process.
Income-solid consistent income poised to continue into the future is what lenders crave. If you had a gap in your employment in the last two years for example, that is something that will have to be explained and documented. Lenders want to have assurance the loan they are making is going to perform well into the future so income continuance is critical. This means if you’re self-employed your income will be averaged over the last two years. It also means pay stubs, and a verification of employment will be required if you are a W-2 employee
Credit score– typically needs to be at least 700 or better. That does not mean if your credit score is less than 720 you can’t get a mortgage, but it does mean that your credit is going to be looked at a little bit more closely (a 580 score is the minimum needed these days). Perhaps you are utilizing a high percentage of your credit and your credit score is slightly lower due to credit card balances? Maybe you missed a payment here and there in the past? Whatever the circumstances are know that anything 700 or better is considered to be good in terms of qualifying for financing.
Debt-optimally, you want your minimum payment liabilities very low in relationship to your monthly income, a target range is 10% or lower of your gross income. A mortgage payment can be a rather large portion of your income. By keeping your minimum payments on obligation to 10% or lower, there is enough room for a mortgage payment fit in. How much mortgage you can borrow is a function of how that payment fits into your income with your other monthly liabilities.
Assets-The ideal mortgage candidate will have a 720 credit score, 20% down and a healthy debt income ratio at 36% and will have a demonstrated ability of good payment history and solid income. Know this- the more cash down you have, the lower the payment. The less cash down you have the more important it is to have lower monthly payments as your debt ratio climbs as you slide up the mortgage payment scale.
Following is a snapshot of what mortgage loan program may be suitable for you based on these characteristics.
(Each scenario based on a 30 year fixed for illustrative purposes)
Great credit score say 720 or above, little cash as a down payment, high monthly payments say greater than 10% of your monthly income optimal loan-FHA 30 year fixed.
Great credit 720 or above little cash as a down payment, really low monthly payments e.g. 10% or under of your monthly income-conventional loan 30 year fixed.
Credit score 700, big down payment 20% plus closing costs, minimum payments on liabilities over 10% of your monthly income -conventional 30 year fixed.
Credit score 620, little down payment, payments under or over 10% of your monthly income -FHA 30 year fixed.
While there are other programs available in the marketplace the above illustrations is to give you an idea of what you might be looking at while balancing your complete financial credit, debt, income and asset picture.
Changing any of the following results in a few financial picture:
- Income – higher or lower
- Credit score – higher or lower
- Assets – higher or lower
- Debts – higher or lower
Anytime you’re going to higher in credit, income or assets that’s a good thing that will help you borrow more and afford more. Debt is the only one of the four items where the target is to go lower by responsibly paying off obligations.
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