Congratulations! You have decided to buy a new home. Here is the information that you will need to consider when qualifying for a home loan and be ready for the loan application.
Down payment is usually required for your home loan. It is the initial investment money that you put down on the purchase of your home. Generally, the higher the down payment, the better rate you will get. Some First Time Home Buyer program only requires 3 percent or even zero down for good credit borrowers.
Paying less than 20 percent down payment usually will subject you to pay for the Private Mortgage Insurance (PMI) because the lender needs to be insured against the 80% credit loss on your loan if you default on the mortgage.
If you can only afford, for example, 5 percent down, but have good credit, you can still get a loan without paying the PMI. The way to do it is to get an 80/15/5 loan (also called piggyback loan) - an 80 percent first mortgage, followed by a 15 percent second mortgage, and 5 percent down.
What is Loan to Value?
It is the ratio of the fair market value of an asset to the value of the loan that will finance the purchase.
How to determine your LTV?
Just divide your loan amount by the appraised value of the home.
For example, if your loan is $80,000, and the home you are buying is appraised at $100,000, your LTV is 80 percent.
If your LTV is high such as 95 percent, you can still get a loan but most likely with a higher interest rate.
There are two debt-to-income ratios that lenders consider. The first one is the housing debt to your monthly gross income ratio (sometimes called the "front-end ratio"); this is your anticipated monthly house payment plus other costs of homeownership divided by your gross monthly income. The other is the overall debt to income ratio (or "back-end ratio"). It takes all your monthly installment or revolving debt (e.g., credit cards, student loans, alimony, child support) in addition to your housing expenses and divide by your gross monthly income to come up with the ratio. Generally, the front-end ratio should not be more than 28 percent, and 36 percent for the back-end ratio for standard conforming underwriting guidelines.
Your credit report and your credit score are part of the factors that will be taken into consideration for your loan. A lender will run a credit report on you to see your spending habit and how you manage your debts. Higher credit score or excellent credit history are essential in getting the best interest rate for your loan.
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