When deciding who is eligible for a home loan, a lender is looking for four basic things; a stable credit history, an ability to repay the loan based on income, how much the down payment will be, and the value of the home versus the amount borrowed.
If these four requirements meet the guidelines set forth by FNMA (Federal National Mortgage Association, more commonly known as Fannie Mae), FHA (Federal Housing Administration), or the VA (Veterans Affairs), then the loan is typically approved and you can look forward to getting your dream home!
In some of our other articles, we’ve covered how a mortgage works. But today, we’ll take a slightly deeper dive into what is required to obtain a loan, as well as giving a better overview of the mortgage process in general.
Before a loan can be approved it is necessary to prove that the borrower can repay the loan. This is a relatively straightforward math equation. The amount of your mortgage payment cannot exceed 25-31% of your income before taxes, depending on which loan program is used. Additionally, your mortgage payment, as well as any other loan payments you may have, such as auto loans, must not exceed 36-43% of your income before taxes.
This second amount can sometimes be as high as 45-50% depending on which loan program you choose to qualify for as well as how much money you will be using as a down payment, and your credit history. This is because the larger the down payment, the more comfortable a lender will be regarding your ability to pay a loan as the amount owed will be less than the value of the home.
If you have ever had a loan or credit card of any kind, you likely have a credit score provided by one of the three credit reporting bureaus. This number ranges from 300 to 850. The higher your score, the better your credit rating. For conventional mortgage loans, you will need a minimum of a 620 score, and for an FHA loan, you will need a minimum of a 580 score.
However, its extremely important to note that there are exceptions to every rule and your income and down payment may alter these requirements and ultimately it is up to the underwriter to approve or deny a loan based on a variety of factors including the value of the homes appraisal, the amount borrowed, as well as down payment and income. Just because you may not meet a credit score requirement, does not mean that a loan cannot be approved so long as you meet or exceed other requirements subject to the underwriter’s discretion.
Appraisal Vs. Amount Borrowed
Here at OVM Financial, as it is with all lenders, it is necessary to have an appraisal done on the property to ensure the value of the home exceeds the amount being loaned to the borrower. This is to help protect the bank in the case of default. Down payment amounts vary but are typically required to be at least 5% of a home’s value or in the case of an FHA loan 3.5%. With a VA loan you may even qualify for a 0% down payment option.
It’s important to remember that the larger the down payment, the less you will owe on the home vs. the value of the home if it is sold. This can provide you with future flexibility regarding the difference between what is owed and what the home is worth, also known as equity. The amount of equity in your home will increase as the value of the home increases, while your down payment will only affect your starting equity.
Oftentimes, having lots of equity in your home can provide not only peace of mind, but also the opportunity to improve your future, as the equity can be used as collateral to obtain all sorts of other loans that you might use for your child’s education or even for home improvements to make your home more appealing.
Once all the requirements have been met your loan will be sent to underwriting for a final approval and closing.
You might be wondering how long does closing on a house take? Typically this is anywhere from 15 to 45 days, but we here at OVM Financial believe that getting a mortgage loan shouldn’t be a time-consuming ordeal, and we work hard to make sure you feel well informed throughout the process. We do everything in our power to make sure your loan closes in a timely manner so you can begin your new life in your dream home!