Money & You – March 2014

Getting a Home Loan

By Tommy Haws

There are few investments in a person’s life as significant as their home.  Since most of us do not have the cash lying around to buy the house outright, there is going to be a loan involved, most likely.   And that usually puts fear in most folks’ hearts because the process can be so intimidating.  The most recent financial crisis that came to a head in 2008 and has continued ever since was spurred primarily through housing loans and how they were being packaged together and sold as an investment on Wall Street.  (This, of course, is an over-simplification but in interest of my time and your boredom, we will just leave it at that).

That crisis triggered a couple of reactions that affected homebuyers and lenders.  For one thing, the loan qualification process quickly became less “easy.”  Before the crisis, there were lenders that did not document things as well as they could and customers did not have to provide as much information as they should have.   As a result, lenders started working on making sure that the borrowers could qualify better and that there was documentation of that fact.  The second thing that it triggered was tighter regulations on the lenders that are just now coming into full effect.

The good news is that interest rates on home loans have been lower for a longer period of time than ever before.  There are historic opportunities at this time to get loans at great rates.  Also, just because the process is harder, that should not be interpreted as impossible.  It just means that there will be a need for you to find a good lender that will work with you and help you through the process.  A trained mortgage specialist will know the new regulations, the required waiting periods and other restrictions and therefore can help you along the way. But here are some basics all borrowers will need to know to get a home loan.

Ability To Repay

The first thing that must be established is the borrowers’ ability to repay.  This means that you must be able to provide proof of your income.  This can be through check stubs, bank account statements, tax returns, etc.  The good rule of thumb is that you do not want your housing ratio to be more than 28% of your gross monthly income.  That means your loan payment should not be more than 28% of your gross income.  This will help in calculating the amount of house you should buy, the length of the term of the loan, and other considerations for qualifying. Then, your total debt (including this housing payment) should not exceed 36% of your gross income.

Example: Take a homebuyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28 percent of gross income is $933. ($40,000 times 0.28 equals $11,200, and $11,200 divided by 12 months equals $933.33.)  Furthermore, the lender says the total debt payments each month should not exceed 36 percent, which comes to $1,200. ($40,000 times 0.36 equals $14,400, and $14,400 divided by 12 months equals $1,200.)

Past Credit History

Generally, you will not be considered for a home loan if your credit score is too low.  Most want to see over 700 for good rates, but there are some programs for first time homebuyers that do not have a score, etc.  Anything below a 650 score is harder to qualify for, especially without paying a very high interest rate. If your credit is not good or there is excessive debt, talk with your banker about ways you can improve the score.

Collateral

Finally, there must be sufficient collateral to cover the loan.  Traditional mortgages are 10-20% down payment – meaning that 20% of the value of the home is not financed but rather paid for up front by the borrower.  This accomplishes at least two things.  First, it shows the lender that the borrower has “skin in the game.”  If a borrower has sufficient amount of investment into the property, it shows a strong commitment.  The second thing it does is that if the loan were to ever default, there is sufficient room in the value for the lender to recover the funds by re-selling the property.  The collateral (the house) will also probably have to pass some basic inspections to show the house is in good shape with the building up to code.

Summary

So, when you apply for a loan, you will be expected to provide your financial information, allow the lender to inquire on your credit, and show collateral sufficient to justify the loan.  It is not as intimidating as it seems.  The lender wants to give you the loan, and will do so if these basic criteria are met.  It is not true that it is impossible to get a loan, etc.  There are some lenders that are better than others, so it will do you well to investigate.  Rates are competitive at this time so you should be able to find a way to get into the home that is best for you.

So, if you are thinking of buying a home or refinancing, upgrading, etc., come and talk to a professional banker and they can help you through the process.

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