Home-buying can appear to be a formidable process. It is a part of the American Dream that most people aspire to, but they do not always know the proper steps to take to prepare themselves to become homeowners.
Here is the Process for Getting Pre-Qualified for Your Boise Home:
The first step is to get pre-qualified. To do this, you can visit the bank or mortgage lender of your choice and have them evaluate your home-buying potential. The lender will take into consideration your income, debt, credit history and cash on hand to give you an estimate of the amount you can afford to spend on a home.
Factors that are taken into consideration for pre-approval of a home loan:
- Credit History
- Cash on Hand
Considering the number of people who are moving to the Boise area, buying a home can be a competitive market. If you take the time to get pre-qualified with a lender, you will present as a serious buyer, and you will have a leg up in the playing field. You will also come away with a more accurate idea of exactly what your future home’s budget should be.
Of course, the first thing a lender will look at when determining your buying potential will be your income. How much money do you make annually? This number will have a lot of pull on where your budget falls and which homes you might be able to afford. The higher your income, typically the more expensive home you will be able to purchase.
If you plan on buying a home with your spouse, then both incomes can be taken into consideration. If your combined income is being used to secure a home loan, then you should be aware that your combined debt and both credit scores will also be taken into consideration.
A quick and easy way to measure your estimated home-buying power is to multiply your annual income by 3. For instance, if you make $60K annually, you should probably be looking at home in the 180K range. You can use both incomes if you are buying a home together with your spouse. Of course, the figure the lender will give you will hold more accuracy than this estimate, but it is a good starting place.
The 3X income rule is helpful, but it may be oversimplified. Your debt to income ratio will come into play as a lender determines just how much money they would be willing to lend you toward the purchase of a home. The lender looks at your overall ability to pay back the loan. That is where your current amount of debt comes into play.
The lender will evaluate the debt you already have. This could include car payments, student loans, and credit card debt, as well as any ordered alimony or child support payments. Money that is already dedicated to paying off existing debt must be deducted from your income to make apparent what amount you have to work with leftover at the end of each month.
When purchasing a home, a good rule of thumb is that your debt should not add up to more than 43% of your gross monthly salary. If your debt threshold is not within this scope, a lender may suggest eliminating some of your existing debt before you begin your search for a home. For an underwriter to approve your home loan, it is important for the debt to income ratio not to be too high.
Credit history is an important factor in getting pre-qualified for a home loan. The way you have handled credit in the past gives a track record of your financial stability and your ability to pay back loans. Ideally, your credit score should fall at a 620 or higher when you are looking to purchase a home.
If your credit score is not high enough, the lender may suggest ways of raising your score before you purchase a home. It is a good idea to go ahead and take a look at your credit report before you begin the pre-qualification process. If you have unresolved issues on your credit report, then getting your affairs into line will benefit you when it comes to getting pre-approved for a home loan.
Many people do not realize how stringent underwriting guidelines can be. If your credit is not in tip-top shape, you may need to do some repairs before you are ready to begin making offers on homes. 580 is usually the minimum score that would be considered for a home loan. 620 to 680 is considered good credit, and 680 to 740 is considered “very good”.
Anything higher than a 740 is an impeccable credit score. If you have struggled with credit in the past, there are many non-profit organizations and credit counselors that can help you rebuild your credit and prepare you for buying a home.
Cash on Hand
Of course, you are going to need a down payment. The lender will look at the amount of cash you have in savings to help determine your buying power. In the past, paying 20% down was standard home-buying practice. It is relatively easy to secure a loan these days with as little as 3% down.
It all depends on the type of loan you apply for. There are loans that can be made with down payments of 3%, 5%, 10%, and 20%.
In a competitive market, your savings will make more of a difference. For instance, if you and another party are making offers on the same home, the party with the most money available to put down on the house will have an advantage.
There are government subsidies available for people who have good credit but have not been able to stash away enough money for a down payment. You may qualify for one of these subsidies to cover your down payment. Local government housing department entities can usually answer your questions as to the criteria for qualifying for one of these subsidies.
Why should you get pre-qualified for a loan before looking for homes?
The pre-qualification process will let you know just how much home you can afford. The lender will give you an estimated price range so that you can go house hunting from a more informed standpoint.
Also, in a competitive market, you stand out from other buyers who have not taken the time to get pre-qualified. You will likely be able to close on a home faster because you will have already had your information evaluated and underwriting obstacles will not be in your way.
How do interest rates impact home buying?
When interest rates are low, new home buyers can secure loans at a lower rate and pay less overall for their home. Homes sell quicker and there is more competition in the housing market when rates are lower. When rates are low and there are excessive numbers of people looking to buy homes, this is known as a “seller’s market”.
When rates are raised, the overall price of buying a home goes up. Fewer people find themselves in the position of being able to afford a home, and the market becomes less competitive until rates are lowered again.