Owning one’s own home is often seen as the American Dream. Finance is at the center of realizing this dream and the vast majority of people who buy a property will require a home loan, also known as a mortgage. Whether you are planning to buy a home for your family or an investment property, it’s important to understand the various factors that can affect your home loan application.
In this blog post, we will look closely at some of these factors, including credit score, debt-to-income ratio, down payment, and more. Let’s get started.
Credit Score
A credit score serves as a prediction of how likely a person is to pay a loan back on time. This is based on information from their credit reports. In the US, an exceptional credit score is between 800 and 850, while a very good credit score is between 740 and 799.
Basically, the higher your credit score, the less risk you pose when applying for a home loan. Your credit score also determines your rate class.
A credit score indicates a person’s borrowing behavior and past payment history and will influence the officer’s decision to approve the home loan (as well as determine the interest rate). Generally, conventional home loans require a credit score of at least 620.
Debt-to-Income Ratio
A person’s debt-to-income ratio is also important during a home loan application because it determines how much home they can afford. Debt-to-income calculations compare the amount a person earns on a monthly basis to the amount they spend on recurring debts. Recurring debts include:
- Student loans
- Car payments
- Insurance
Let’s give you an example. Imagine a person who has a monthly income of $6,000 and fixed recurring expenses of $4,000 per month, including the house payment.
Therefore, the debt-to-income ratio is around 66%. For a conventional home loan, the limit is typically around 43%, meaning a 66% debt-to-income ratio would not be acceptable.
Down Payment
The more money that a person is able to put toward their down payment, the less they will need to borrow for a home loan. It will also determine the type of home loan a person gets, such as a high-ratio mortgage.
Generally, a down payment that exceeds 20% will get a person a conventional mortgage. Below that rate, Private Mortgage Insurance is required, which adds to the overall cost of a home loan.
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Loan Type
Different loan types have different eligibility criteria and requirements. For eg, a government-backed loan, such as an FHA loan, might have easy credit and income requirements, but may require a mortgage insurance.
Factors That Can Affect Your Home Loan Application
If you are planning to purchase a home, it’s important to take each of the above factors into consideration when you begin your home loan application process. We recommend that you properly understand the home loan requirements before making an application, to ensure that your application will be approved.
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