5 EASY BABY STEPS TO QUALIFY FOR A HOME LOAN
1. Order your credit report and scores from all 3 bureaus: Experian, Equifax, and Transunion.
Review your credit report, line by line, account by account. Verify that the payment history is accurate. Verify the amount owed is accurate. Verify that your monthly payment on each account is accurate. Be sure that old or closed accounts are not reporting a monthly payment. If there is anything inaccurate in your credit report, go to work on it first prior to applying for credit. It can make a major difference in how much you spend over the life of the loan and how much you may qualify to borrow.
2. Establish a detailed report that outlines ALL of your finances.
Figure out where you are spending your money. Gather up your monthly, quarterly and annual bills and outline all of your expenses thoroughly. Itemize all your expenses. Determine what your PITI expenses are. PITI is an acronym for a mortgage payment that includes - principal, interest, taxes and insurance. Also determine your total monthly debt expense. Debt expense includes items like: Auto Loans, Student Loans, Personal Loans, Charge Cards, Child Support, Alimony, and Federal Tax Liens.
In determining your debt expenses do not include: utility bills, car & health insurance, cell phone bills, or any bills not reflected on your credit report.
You are almost there! Now that you’ve done your research, confirmed that your credit report is accurate and identified all your expenditures, you can do a preliminary check of your expenses to determine how much mortgage you can afford and assess the same ratios that your lender will use.
3. Calculating the FRONT END RATIO
The front end ratio is determined by taking your monthly housing expenses (PITI) divided by your monthly gross income
Front end ratio = Monthly Housing Expense
Gross Monthly Income
*This percentage needs to be 29% or less for approval on a FHA loan.
4. Calculating the BACK END RATIO
The back end ratio is determined by taking your total monthly debt expense (see #2 to calculate) divided by your gross monthly income.
Back end ratio = Monthly Debt Expense
Gross Monthly Income
*This percentage needs to be about 41% or less for approval on a FHA loan.
*-These percentages are a rough guideline for what you can expect when applying for a FHA loan. Just because your ratio may be a bit higher does not disqualify you automatically. The bank will consider your credit score as well as your income in determining whether or not you can afford the loan.
5. Apply for the loan
You’ve done your diligence. You’ve inspected your credit report and corrected any mistakes. You’ve identified and outlined all of your expenses. Now you can use these ratios to paint your own personal picture of your finances in the same light that the bank will.
A common mistake many people make is agreeing to the first set of terms on a loan that you’ve been approved for. Remember, EVERYTHING is negotiable. Points, interest rates, fees…these are not set in stone although your loan officer may have you believe otherwise.
If you are unhappy with the rate or the terms of the loan offered, ask for a different product or look elsewhere for your loan. This is one of the most important financial investments you will make in your lifetime- make sure it is on terms you can be happy with. Good luck!
If you would like a free worksheet to help outline your budget/ expenses and calculate these ratios for you, please send me an email and I’ll be happy to forward you my worksheet for free.