Luczak Group - The Blog

Information for happenings in the Real Estate Market in the Pikes Peak Region... and some things we just find interesting!

Tips for Home Buyers

The Financial Corner - January

Happy New Year!! In an effort to constantly improve information provided to our clients, we will present a monthly blog on financial information useful to buying or selling a home. We will call it “The Financial Corner”. This is the first in a series of twelve monthly blogs for the Financial Corner – and it provides basic guidelines to getting approved for a mortgage loan. Hope it
provides you with useful information.


Getting Approved for a Mortgage Loan 

Lenders consider several factors when determining whether to approve you for a mortgage loan, and preparation is key to getting it approved.  Before completing the mortgage loan application, you should review the following items: monthly gross income (before taxes and deductions); total monthly debt payments (car loans, credit card minimum payments, and student loans); credit score and any credit issues in the past couple of years; down payment and closing costs; and new home affordability.


Monthly Income. When applying for a mortgage you will have to document your monthly income. Most lenders prefer lending to borrowers who have worked in the same field for at least two years. This is not an absolute rule though; some lenders may have different employment history rules. You will need to provide at least two months’ pay stubs, and if you are self-employed you may have to submit copies of your past one or two years’ tax returns


Debt Obligations.  Lenders are also concerned with your debt and what they refer to as your debt to income (DTI) ratio – a comparison of your housing expenses and your monthly debt obligations versus how much you earn.  For example, if you pay $1,000 a month for your mortgage, $300 for your car payment, and $100 for your credit card, your monthly debt payments are $1,400.  If your gross monthly income is $4,000 then your DTI is 35%. $1,400/$4,000 =35%.  Lenders like to see a DTI of 36% or less but depending on the lender and type of loan program will go as high as 45%.


Credit Health. Before applying for a mortgage get a copy of your credit report and credit score. You will want to verify that there are no errors on your report or recent late payments. Do not apply for new credit in the few months leading up to your mortgage application. Lenders get suspicious if it looks like you are taking on a lot of new credit. As for your credit score, it should be at least 680 and preferably above 700. The lower your credit score, the higher the mortgage loan rate you will pay. There are government insured loans available such as FHA loans if your credit is under 680, but there are significant additional costs.


Down Payment and Closing Costs. In today’s market expect lenders to require at least 10% down unless you are getting an FHA loan – where as little as 3.5% is the required down payment, a VA loan where there’s zero down payment or some other special program loan. If you have it, consider putting 20% down to avoid private mortgage insurance (PMI) – insurance that protects the lender should you foreclose before building sufficient equity. For most borrowers, the source of down payment comes from either savings or equity they’ve built in their current residence.  Additionally, closing costs need to be factored into the purchase of a home.  At the closing table, you may be responsible for some of the following fees:  loan origination fees, underwriting fees, recording, survey, and title fees to name a few.  You can expect closing fees to be between 2% and 3% of the purchase price of the home.  Lenders don’t want you to deplete your savings for a down payment and closing costs so make sure you have reserves in the form of cash or assets you can quickly convert to cash.


Home Affordability.  How much house you can afford and how much you are comfortable paying are two different things.  A good rule is that monthly housing costs which include mortgage payment, homeowners’ insurance, property taxes, and HOA fees should not exceed 28% of your monthly gross income.  Monthly debt payments, including new monthly mortgage payment, car payments, credit card bills and student loans, shouldn’t exceed 36% of your gross income.  Decide on the maximum amount you want to spend before beginning the mortgage lending process and borrow what you can afford to repay. If you are a prime borrower – good credit and income, a reputable mortgage lender should approve your mortgage loan and offer you their best rates. If you have imperfect credit don’t be discouraged, there are loan programs out there for you too, so shop around!!