Arizona FHA lender explains what is involved for a borrower to qualify for an FHA pre-approval
For first time home buyers and even repeat home buyers it is always helpful to know what items in a borrowers loan file are most important when applying for a mortgage pre-approval. The answer is there are several items in a borrowers loan file that are reviewed when a pre-approval application is submitted, however we are able to narrow that down to focus on four particular factors that mortgage underwriters place the highest importance on when reviewing an application.
In order to purchase a home with an FHA mortgage loan, mortgage lenders follow the guidelines set forth by FHA as well as any additional guidelines that may be specific to their company. It is important for borrowers to understand that guidelines often change depending on what is happening in the housing and financial markets. Following the housing and financial crisis in 2008 many banks and mortgage lenders tightened credit in response to what was happening in the housing and financial markets. That resulted in credit score and income requirements being tightened and underwriting of borrowers files being more stringent.
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Now we find that the housing market is returning back to normal and banks are loosening the credit and income requirements on mortgage loans thus opening the door for more people to qualify and purchase a home.
When applying for a mortgage pre-approval borrowers should know ahead of time that underwriters look at a range of items in a borrowers file but they pay close attention to the following four items. Borrowers who have been planning their home purchase at least one year before they actually buy should be financially prepared to answer these four questions:
Credit
Borrowers hoping to obtain an FHA loan for their home purchase should set a goal of having a credit score of 640 or higher. In some cases lenders can go as low as 600 on a credit score but most borrowers should try to have their credit scores above the 640 level when they apply for an FHA mortgage loan.
Income
Lenders like to see that a borrower has been at their job for two years or more, and the income is stable with a reasonable probability of continuing on in to the foreseeable future. Lenders ideally would also like to see that income over time has been increasing, rather than decreasing.
Debt to Income Ratio
For FHA loans, lenders like for the borrowers debt to income ratio (DTI) to be 41% or less with a borrowers long term debt trending down in relation to income. For the year leading up to your home purchase, try to minimize taking on any large debt that might adversely affect your DTI ratio. For example, if you need to replace a car, try buying a used car with a smaller monthly payment rather than a new car that will come with a higher payment.
Down Payment
Underwriters like to see borrowers who have demonstrated a level of financial responsibility leading up to their home purchase. Borrowers who have been able to save the FHA required 3.5% towards a down payment have shown that they can reign in their spending in order to put money aside for their family’s financial future.
Keep in mind that borrowers buying a home must pay at closing for the down payment along with closing costs and prepaid items such as prepaid interest, taxes and insurance. On a $100,000 home purchase for example, the FHA 3.5% down payment would be $3,500 plus closing costs + prepaids of about $2,500 for a total of about $6,000 the borrower needs to come up with to get in to that home.
Anything potential borrowers can do to have their financial house in the best possible order when their mortgage application is submitted is making it that much easier for the underwriter to approve their application. Consult with your Arizona FHA lender and mortgage loan officer well ahead of applying for a mortgage so your financials are in the best shape that they can be.
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