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How to
qualify for your first Home Loan
February 2nd, 2006
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There are a
few things that you need to have accomplished before searching for
you new home. Usually a real estate agent wants to have a letter of
pre-qualification for a home loan to start shopping for a home. In
order to qualify for a home loan you need to meet certain
requirements.
Before you
apply for any home loan you should get a copy of your credit report
from the credit reporting agencies. You can either sign up for a
yearly monitoring service that will send you a report once a year
with quarterly updates for credit changes, or you can contact each
of the agencies directly for a copy of the report. Try to get your
credit report cleaned up and improve your credit score. If there
are any errors contact the reporting agency to get the information
corrected.
You need to
save for a down payment for a home and be ready to show that you
have the money to do this before applying for the loan. You should
visit the FHA website for the calculator that is available to figure
out how much of a home you can afford. This is a great place to
start when planning to buy your first home. After you have
calculated the amounts you will know how much income is needed along
with the down payment. Generally speaking you should have about
one-third of your income available for a mortgage payment. Anything
over this would make it hard to qualify for a loan and would be the
negotiable factor of the loan, based on down payment amounts, and
credit score, as well as the type of loan.
If you have
car payments, a student loan, child support payments, or monthly
credit card payments, they count against your income. It is part of
the equation in calculating how much income you have available to
spend on a mortgage. The calculators are good about figuring in
these expenses. It is your job to add them all up.
Don’t forget
that other hidden costs that are involved with owning a home.
Mortgage insurance if your down payment is low it is required as
well as home owners insurance. There is also property taxes which
are different for each state. Most often seen with condos are home
owner’s association fees which vary greatly depending on the
location. Also newer home tracks can also have home owner’s
association fees attached to them as well. If the home you want to
buy is in a flood plain or earthquake area your lender may require
this extra insurance as well. Fire prone and mud slide areas also
have higher insurance rates too. The more down payments you have,
the less the lender can require and you can save money in not having
to buy mortgage insurance.
Chances are a
fixed rate loan is the best type of a loan to get, because your
payments will not fluctuate when interest rates change, and you
won’t have a balloon payment that could put you in a crunch in the
future. If you are a first time buyer you should try for the
government sponsored loan programs. Countrywide loans are one of
the biggest home loan lenders. The lender that you work with should
be able to offer a FHA or VA type of a loan especially if you are
employed and a first time home buyer. There are maximum dollar
amounts that these loan programs which can make it hard to cover the
cost of the house in expensive housing markets. In this case you
would either want to save more money to cover the difference in
price or try to find a house or condo that is within the loan
amount.
Your income
needs to be adequate enough to show that you are making a good
living. If you are employed you may only need a few months worth of
pay check stubs showing your income, along with a credit check, and
bank statements. The government has FHA and VA loans that make the
down payment considerably lower as well as let you finance a larger
loan amount than a traditional fixed rate loan would do. So if you
are employed and have good income and credit ratings the first place
to shop for a loan is for an FHA or VA loan. Fannie Mae and Ginnie
Mae are government backed programs that offer assistance and
programs for lenders to loan to persons that have low to moderate
income. The government programs do not lend the money themselves
but help make it possible for lenders to loan to lower to middle
income individuals.
If you own
your business and are self-employed you can expect to be put under a
microscope for fine inspection. You probably will not get the perks
of a first time buyer and will most likely need a larger down
payment to get your first home loan. You will need to provide
income tax records going back for a 2 year period if you want a good
fixed rate loan. If you don’t have great income tax records, but
you have good credit and a large down payment you can go with a
stated income home loan. The benefit is that you can get a loan
despite a bad tax year. The bad part of a stated loan is that they
are usually adjustable interest rate and you have to put a large sum
ranging from 10 - 20 percent for a down payment.
The loan
broker is a person that shops for the best loan for you. This can
be a good and a bad thing. This is usually better for people that
do not have good credit and are self employed. If you have all the
elements for qualifying for a FHA or VA loan you should not go to a
loan broker. If you find that you are not in the running for the
low down payment loans then you should check in with a loan broker
to help you find a loan.
With the
internet, many loan brokers are now online and make it a quicker
process to shop a loan for you. You should be careful to give your
information on the internet and check to make sure that the company
is legitimate. E-Loan for instance is a company that has been
around and will not take your information and use it for fraudulent
activities. Make sure that the loan broker shows you all your
options available and don’t fall victim to financing more than you
can afford. Many times a broker will get you a pre-approval that is
for an ARM loan. The bigger the loan amount the more commission
they get. The day you go to finance the fixed rate loan on the
higher amount you won’t be able to, you will get stuck with the ARM
loan. So know what you are truly able to afford for a fixed rate
loan.
The reality
may be that the only way that you can afford a loan is by going with
an ARM (adjustable rate mortgage) or one that has a balloon
payment. This is a riskier investment in the long run as there will
be a good chance that you will end up selling your house sooner.
Refinancing also is something to consider in the future and you
should make sure that the loan you choose lets has no penalties for
paying off early.
Planning in
advance the down payment, your credit rating and your income is the
first steps in home ownership. If you get the savings for the down
payment you are more than likely on your way to home ownership.
Owning a home is advantageous not only for the extra tax deductions
on the interest paid on a mortgage, it also usually increases in
value and you earn equity in the home. Being knowledgeable about
the home loan process is extremely helpful because it removes much
of the anxiety in the buying process.
By
Nicole Wilson
Best Syndication Staff Writer
Real Estate
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