HOW DO I KNOW IF I CAN QUALIFY FOR A MORTGAGE?

"How do I go about getting approved for a mortgage?" "I would love to purchase a home but I know I have some things on my credit that I need to clear up first. Who do I talk to?" As a REALTOR I hear these questions all the time from potential buyers, especially first time buyers. The best way to get a sure answer is to contact a loan officer or mortgage specialist for pre-approval. If you still have some things to clear up they can also guide you in determining what items you need to focus on in your credit report.

If you need to speak to a loan specialist contact me via email at adam.lane@coldwellbankeratlanta.com 

While the best way to find out where you stand is to speak with a specialist, there are some general conditions you can use that can give you an idea as to whether or not you can qualify based on your current situation. REMEMBER...being ready to purchase a home does not end with having a good credit score and steady income. The number one reason buyers are struggling to close is CASH! You must remember that you will need anywhere from 3.5 to 5 percent of the sale price for a down payment AND cash for closing cost. We are going further into a sellers market so buyers must be prepared to take on the bulk of closing cost in addition to their down payment.

Of course the first factor is your credit score. The magic number in our current market is 640. This is the number most lenders are looking at as a starting point. As with most rules, there are exceptions. Depending on the type of financing the minimum credit score requirement may be higher or lower than 640. The other two most important areas are income/employment history and debt to income ratio.


Below is an example scenario based on current FHA requirements for loan approval.

1) MORTGAGE PAYMENT EXPENSE TO EFFECTIVE INCOME

Addup the total mortgage payment (principal and interest, escrow deposits fortaxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.).Then, take that amount and divide it by the gross monthly income (income before taxes). The maximumratio to qualify is 31%. Seethe following example:

	Total amount of new house payment:	$750
	Borrower's gross monthly income (including spouse, if married):	$2,850
	Divide total house payment by gross monthly income:	$750/$2,850
	Debt to income ratio:	26.32%

 

2) TOTAL FIXED PAYMENT TO EFFECTIVE INCOME

Addup the total mortgage payment (principal and interest, escrow deposits fortaxes, hazard insurance, mortgage insurance premium, homeowners' dues, etc.)and all recurring monthly revolving and installment debt (car loans, personalloans, student loans, credit cards, etc.). Then, take that amount and divide itby the gross monthly income(income before taxes). The maximum ratio to qualify is 43%. See the following example:

	Total amount of new house payment:	$750
	Total amount of monthly recurring debt:	$400
	Total amount of monthly debt:	$1,150
	Borrower's gross monthly income (including spouse, if married):	$2,850
	Divide total monthly debt by gross monthly income:	$1,150/$2,850
	Debt to income ratio:	40.35%