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The three tests to pass for getting a loan to purchase a home.


Friday, April 9th, 2010

There are three crucial tests you must meet in order to qualify for a home loan in today’s world. The tests are down payment, debt ratio and credit quality. As recently as 2007 you might only need to meet one of these tests. The financial and related housing crisis makes it unlikely we will ever see such liberal lending standards again. When you are buying a home these three tests must be met.

 

The first test is down payment. This is how much money you are going to invest in the property. On a conventional loan you will generally need 10% of the purchase price or more. If you are putting less than 20% down you will have to pay mortgage insurance. This is insurance that at least partially protects the lender against a loss. An FHA loan currently only requires 3.5% down and also requires mortgage insurance. However, the rates for mortgage insurance on FHA loans are generally lower than conventional loans.

 

The next test is debt ratio. Debt ratio is determined by comparing the income that you can document with the debts that show up on your credit report plus your new mortgage payment. Both conventional and FHA loans prefer debt ratio’s in the low 40% range. However, if you have what is called “compensating factors” an acceptable debt ratio could go a high as 50%. So, for example, if you have an income of $5,000 per month and the total of your debts plus new mortgage is $2100 your debt ratio is 42% ($2100 divided by $5,000).

 

The final test is credit quality. Credit quality is not only your credit score but how many accounts you have and how long you have had them. Typically you would want to have several accounts that are two years or more old with good pay history. The best approach is to get a copy of your credit report and review it. Make sure that you check it for accuracy and proper reporting of your credit history. If you find anything that appears incorrect contact the credit reporting agencies immediately.

 

Before you venture out to look at buying a home get yourself pre qualified with a lender. Ask the lender to qualify you for the maximum amount possible. This may not be within your budget but it will give you the high side. Remember there is a difference between what you can qualify for and what you may be willing to pay. Focus on meeting these three tests you and will increase your chances of qualifying for a loan. If you have any questions I can be reached at burtcarlson@hotmail.com.



Article by Burt Carlson

The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com



Tags: fha loan , getting a home loan , qualifying for a home loan