Here is a list of 4 numbers to know before shopping for a house.
- Having a great credit score is quite important, even if you are not buying a house, or applying for a loan. But when it comes to getting a mortgage to purchase a house, this is where most lenders will start. In today’s market, there are a number of programs offered by lenders, some guaranteed or insured by government. Ideally you will need to get your score above 620 to get the best option. Some lenders will work with as low as 550.
Lenders will often have their own way to calculate your score, so shopping for a lender may be a good idea. Just be careful not to over do it with too many inquiries, as it may lower your score.
Debt to Income
- While a good credit score is important, many buyers forget about their other obligations. Even with the best credit score, if your debt is too high, the lender may still not approve the loan. The lender wants to make sure that you will be able to add another installment payment to your monthly obligation, and keep it up. Debt To Income ratio is a percentage number you get when you divide your monthly payments with your monthly income.
Front End Ratio: Add up Principal, Interest, Taxes and Insurance (PITI), some lenders may also include HOA dues; then divide with your monthly income. Generally you want this number to be below 28%. Some loans will qualify with a little higher percentage.
Back End Ratio: Take PITI and add all other debt payments you may have, Credit Card, Student Loans, car payment… then divide with your monthly income. This number should be below 45%. On an FHA loan, below 56%.
- The Down Payment will be one of the first things to consider to determine the type of a loan you will qualify for. Some of the more popular loans are FHA, VA, USDA and Conventional.
There are several options when considering a loan, one thing is constant. The lower the down payment – the higher the risk. Every lender will consider this when reviewing your application. While there are some loans with 0% down, these usually require some sort of mortgage insurance and often a higher interest rate.
- Having a great credit score, low debt to income ratio and high down payment, you may still want to reconsider getting a loan. Why? Not having any assets. While lenders will not check on your bank account, unless you are buying a second or a third home, you may sill want to keep a little cushion. It is always a good practice to have a financial cushion of 3-6 months savings.
Whatever you do, the best thing is to contact a lender before you start shopping. This will help you set a realistic goal and avoid surprises and/or disappointments.
Oh yea, before you get unhinged on me about being a cash buyer, reality is, the majority of us will need a loan to buy a house. However, the truth is that a number of buyers that could pay cash will often get a mortgage to purchase a house. It’s called leverage, and it is a good thing.
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