Maximizing Your Credit
Now more than ever, there is a lot of confusion about being qualified for a home mortgage – and a lot of misinformation as well. It’s common to hear people say, “I heard banks aren’t lending money right now,” or, “I heard you need to have 20 percent down to get a mortgage these days.”
While mortgage underwriters look at a lot of different information to determine whether you’ll qualify for a mortgage, ultimately, it comes down to four things: credit, equity, income and assets.
Your credit is one of the most important things that will be considered when determining if you qualify for a home loan. It’s also one of the things some people do not fully understand. Your credit history is how a lender will judge the likelihood that you’ll pay them back the money they lend you. To do this, a lender will look at the length of your credit history, how reliably you’ve paid on your loan accounts and if you’re maxed out on credit cards or loans. These are also the factors that determine your credit rating. Your credit score will be used to qualify you for a mortgage and will often determine the interest rate you will be offered.
In addition to credit score, lenders will look at items on a current credit report. They’ll want to see accounts open for at least a year and that there aren’t any large outstanding collections or judgments. If you have collections or judgments on your credit report, you will usually have to take care of those first before you can get financing (the one exception to this is usually medical bills). The other thing that won’t show up on your credit report, but is verified, is your rental history. Lenders want to see if you’ve
had any late rent or mortgage payments in the past 12 months. Being late on just one single payment can make getting approved difficult.
When buying a home, keep in mind that you will not only need to have funds for the down payment, but you will also need additional cash for various settlement fees. These can range quite a bit depending on the type of the loan and the area where you are buying; talk to a well-respected lender to learn more. The good news is that home loan programs allow you get a credit from the home seller to help pay for these settlement fees, as well as additional costs, like your first year’s taxes and insurance.
Another factor looked at by lenders is your debt to income ratio (DTI). This is simply your fixed expenses with the new mortgage compared to your gross monthly income (income before taxes are taken out). Lenders typically want to see someone spending less than 50 percent of their gross monthly income on these fixed expenses, which include your mortgage payment, property taxes, association dues, home owners insurance, car loans, student loans, credit cards and any other fixed payments that would show up on your credit report. Variable expenses like utilities, phone and cable are not included in your DTI.
By owning investment property, self-employed individuals can count money earned from a rental property or properties as earned income. In some cases, rental property is also considered an asset; as long as the property is leased out. For this reason, it is highly recommended to have a trusted Property Management company to both shield your investment and ensure the property stays leased with quality tenants.
To simplify, there are many different factors that go into qualifying for a home loan today. Hopefully, this will help you figure out where you stand and whether now is a good time for a new home loan. When it comes to obtaining any home financing, make sure you talk to a good mortgage lender who will walk you through all of the specifics. When it comes to renting a home while saving to qualify for a mortgage, make sure that your property management company is solid and transparent. And finally, if you have investment property, maximize your investment by way of a property management company, they have the expertise to ensure you have an asset and not a liability.