For many, the American Dream is to become a homeowner. There’s something to be said about having a home that you can call your own.
Plus, putting money towards owning a home generally makes more financial sense than putting money towards renting an apartment, since the money you put towards a house is an investment in that house, whereas you won’t build equity by renting.
However, most buyers will need to take out a mortgage in order to afford a new home, and not everybody may qualify. Here is some information that will help you understand whether or not you’ll qualify as a home buyer.
Qualifying As A New Home Buyer
The reason not everyone can qualify to take out a mortgage is that lenders are taking a big risk lending money to home buyers. If the buyer is unable to make mortgage payments, it causes the lender a lot of problems.
To mitigate this risk, there are a number of things that lenders will look at to determine whether you qualify to take out a mortgage and become a new home buyer.
The following are some of the factors that they take into consideration:
Your Credit History
Not only will lenders look at your credit score, they’ll analyze your credit history as well. Your credit score can not only be the difference between qualifying and not qualifying, but it can affect your interest rates as well. The higher your score is, the more favorable the loan terms will be.
A poor credit score, however, tends to be a red flag to most lenders. Poor credit scores are often indicative of either financial troubles or a lack of financial responsibility.
If they look through your credit history and spot a lot of missed or late payments, there’s a good chance your application will be rejected. They’ll assume that if you have a history of financial irresponsibility that nothing has changed, which means there’s a major risk that you won’t pay your mortgage payments on time or at all.
Anything above a credit score of 740 is considered good. Most lenders will require borrowers to have a credit score of at least 620 to qualify. You may still be able to qualify with a lower score depending on certain factors, including applying for specialized home loans, such as FHA loans.
Not having any money in savings can also hurt your ability to qualify for a home loan. While you don’t need to have a substantial amount, lenders like to see that you are at least able to afford a small down payment.
Most lenders will require a 5% down payment at the very least. A lack of any kind of savings means that you won’t be able to put down a down payment and also makes you a risk when it comes time to begin making your monthly mortgage payments.
If you’re living paycheck to paycheck, then any type of financial emergency, such as a medical emergency, could make it difficult for you to make your mortgage payments on time or at all.
No lender will approve a home loan if you aren’t currently employed. In most cases, if you’re not employed it means that you’re not getting paid, which means you have no way to pay your mortgage.
Additionally, lenders want to see steady employment. If you’ve changed jobs three times in the last year, it’s a big red flag.
Generally speaking, lenders want borrowers to have at least two years at their current place of employment. This indicates that you have a stable income that you can depend on – and that lenders can depend on as well.
Your income matters a lot, especially when determining how big of a loan you can qualify for. If you don’t make enough, then you may not qualify for bigger loans.
However, it’s not just the amount you make that lenders judge. They will also look at your debt-to-income ratio. You may be making a million a year, but if you’re millions of dollars in debt, you’ll be considered a huge risk by lenders.
The less debt you have, the better, since this means that you can prioritize your mortgage payments.
Most lenders will require that borrowers spend less than 50 percent of their gross monthly income on their debts and expenses no matter how big the loan is that you’re applying for.
Qualifying For A New Home
These are some of the main factors that lenders take into account when deciding whether you qualify to take out a mortgage and become a homeowner.
For information about the properties we have for sale, be sure to contact us at The Homestead at Summer Lake today.