How To Become Qualified
Generally, you can afford a home equal in value to between two and three times your gross income.
Based on your current rent, use this calculation to figure out how much mortgage you can afford.
Multiplier: x 1.32
Because of tax deductions, you can make a mortgage payment - including taxes and insurance - that is approximately one-third larger than your current rent payment and end up with the same amount of income. This calculation assumes a 28% income tax bracket. If your tax bracket is higher, your savings will be too.
You can obtain a copy of your credit report using any of the following:
- Visit www.annualcreditreport.com
- Call the Annual Report Request Service at 1 (877) 322-8228
- Write to Central Source LLC, P.O. Box 105281; Atlanta, GA 30348
- Contact each individual credit report vendor:
- Visit www.creditkarma.com
5 Factors That Decide Your Credit Score
Credit scores range between 200 and 800, with scores above 620 considered desirable for obtaining a mortgage. The following factors affect your score:
1. Your Payment History - Did you pay your credit card obligations on time? If they were late, then how late? Bankruptcy filings, liens, and collection activity also impact your history.
2. How Much You Owe - If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have a good portion of balances to total credit limits.
3. The Length of Your Credit History - In general, the longer you have had accounts opened, the better. The average consumer’s oldest obligation is 14 years old, indicating that he or she has been managing credit for some time.
4. How Much New Credit You Have - New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.
5. The Types of Credit You Use - Generally, it’s desirable to have more than one type of credit - installment loans, credit cards, and a mortgage, for example.
What You Can Do to Improve Your Credit
Credit scores, along with your overall income and debt, are big factors in determining whether you will qualify for a loan and what your loan terms will be. So, keep your credit score high by doing the following:
1. Check for and correct any errors in your credit report.
2. Pay down credit card bills. If possible, pay off the entire balance every month. Transferring credit card debt from one card to another could lower your score.
3. Don’t charge your credit cards to the maximum limit.
4. Wait 12 months after credit difficulties to apply for a mortgage.
5. Don’t order items for your new home on credit - such as appliances and furniture - until after the loan has been approved AND YOU HAVE CLOSED THE MORTGAGE LOAN.
6. Don’t open new credit card acccounts before applying for a mortgage.
7. Shop for mortgage rates all at once. Too many credit applications can lower your score, but multiple inquires from the same type of lender are counted as one inquiry if submitted over a short period of time.
8. Avoid finance companies. Even if you pay the loan on time, the interest if high and it will probably be considered a sign of poor credit management.
Loan Types to Consider
Brush up on these mortgage basics to help you determine the loan that will best suit your needs.
Mortgage Terms - Mortgages are generally available at 15, 20, or 30 year terms. In general, the longer the term, the lower the monthly payment. However, you pay more interest overall if you borrow for a longer term.
Fixed Interest Rates - A fixed rate allows you to lock in a low rate as long as you hold the mortgage and, in general, is a good choice if interest rates are low.
Balloon Mortgages - These mortgages offer very low interest rates for a short period of time - often 3 to 7 years. Payments usually cover only the interest so the principal owed is not reduced. However, this type of loan may be a good choice if you think you will sell your home in a few years.
Government Backed Loans - These loans are sponsored by agencies such as the Federal Housing Administration (www.fha.gov) or the Department of Veterans Affairs (www.va.gov) and offer special terms, including lower down payments or reduced interest rates to qualified buyers.
What Do You Need for Pre-Approval?
Copies of at least one pay stub for each person signing the loan
Copies of tow to four months of bank or credit union statements for both checking and savings accounts
Addresses where you have lived for the last five to seven years, with names of landlords if applicable.
Copies of your most recent 401K or other retirement account statement, if applicable
Documentation to verify additional income, such as child support or a pension.
Copies of personal tax forms for the last two to three years.
Contact Information for Local Loan Officers
Contact your local tax assessor for current property tax information. If the property is within city limits it will be subject to county and city taxes.
Other things to consider in the cost of owning a home:
Utility costs: Electricity, water, sewer, gas, etc.
Maintenance: Upkeep on home, replacing appliances, replacing old or failed systems
Association Fees: If applicable, some subdivisions and condo communities require payment of an association fee