Buying a home in the new year? Whether this is your first go-around or you’ve purchased before, there are steps you can take to make sure you’re a qualified homebuyer —and being a qualified homebuyer is the key to getting the best deal you can on your mortgage.
Remember the 4 C’s as you get started: Cash, Credit, Capacity, Collateral. Here’s more:
CONSIDER YOUR CASH
Often referred to as “Capital,” the amount of cash you have can make or break a mortgage deal. But, your ability to become a qualified homebuyer doesn’t only depend on how much is in the bank —it’s also about where the money came from and where it’s going.
Here are a few tips when considering your cash:
#1. Save for a Down Payment
The bigger the down payment you make, the more likely mortgage providers are to approve you at a great interest rate. For most conforming loans, a down payment equal or greater to 20% of the purchase price is required, but there are some programs (like FHA and VA loans) that will allow for a smaller down payment. Learn how some new are homebuyers working with a lower budget for a downpayment here.
#2. Don’t Forget Closing Costs
Most mortgage professionals agree that closing costs are typically equal to 2-5% of the home’s purchase price. As with your down payment, your mortgage lender will want to verify you have the funds to cover these expenses. It’s important to understand how to save and calculate closing costs before you dive in.
#3. Manage Gifts
If you’re accepting a cash gift from a family member as part of your down payment, make sure this is well explained and documented. Your bank statements will be reviewed for any large deposits (anything over a few hundred dollars), and any unusual deposits could derail your ability to be a qualified homebuyer.
CATAPULT YOUR CREDIT
Also referred to as “Character,” your credit is your history of debt repayment and credit score. In most situations, 580 is the minimum for a low down payment FHA loan, while 620 is the minimum for most conventional loan programs.
Here are a few tips when trying to catapult your credit:
#1. Review Your FICO
Most lenders will request your FICO score from the three credit reporting agencies, but will then toss out the high and low score to use the middle for assessment. Before shopping your mortgage, make sure you have a clear picture of your FICO score and that your report is free from errors.
#2. Improve Your Score
Not everyone has perfect credit. In fact, the U.S. average is 687. If you’re trying to up your creditworthiness to become a qualified homebuyer there are some simple things you can do —from paying down debts to making on-time payments— to see some positive increases.
CREATE THE CAPACITY
Your “Capacity” is your ability to make monthly payments on your mortgage and to repay your loan over time. Lenders will look at your income to determine if you have the capacity. Here are two of the big ratios they will look at:
#1: Calculate Your Housing-to-Income Ratio
This number is what percentage of your gross monthly income (verified via pay stubs, W2s, tax returns and other documentation) will be spent on your monthly housing expense. Your total housing expense includes principal and interest, property taxes, homeowner’s insurance, and any mortgage insurance and homeowner’s association dues. To get the best terms, you want this number to fall below 30%.
#2: Keep Your DTI Low
Your debt-to-income ratio is called the “back-end ratio” and is the percentage of your gross income spent on housing (like above) plus your other monthly expenses. These additional expenses could be credit card payments, student or car loans, or any other debts. Child support and alimony are part of this equation. In most cases, you cannot qualify for a mortgage with a DTI of more than 43%. How can you figure out where to start on debt-to-income? Read up on how much house you can afford.
CHECK THE COLLATERAL
Regarding the home being purchased, the collateral confirms to your mortgage provider that they have a way to recover their losses should you default. To ensure the collateral is worthy of the loan you’re taking out, there are a few ways the lender will “check the collateral.”
#1. Get an Appraisal
Your lender will almost always require an appraisal to ensure the amount loaned does not exceed the value of the home. An independent appraiser will consider factors like recent sales, a home’s location, its condition and other factors. If the appraisal comes in below the purchase price, the borrower will only be approved for the lower amount.
#2. Get an Inspection
The inspection will help your lender determine the condition of the home and that it is safe and structurally sound. While this inspection is not always required, it is strongly recommended.
Putting it into Practice
When it’s time to shop your mortgage, reach out to a Sindeo Mortgage Advisor. With the recent release of SindeoOne, homebuyers can shop and compare over 1000 loan programs by filling out a single application in just 5-minutes. You’ll find the best deal for your specific situation in no time! Connect today.