Loan Types & Requirements

Lease almost up? Ready to make the jump to homeownership? Whether now is the right time to buy a home, & which loan type to pursue can depend on a few different factors.  For many, a 580 FICO score & 2+ years of steady income can be all that's needed. Let's break down the top 5 factors influencing a person's ability to secure a home loan, or watch a short video  HERE .

 

1. Debt-to-Income Ratio  (current income / expected expenses) 

A person's DTI ratio is determined by how much of their taxable income (dating back 2 years) goes towards paying off the debts they've incurred, or plan on incurring.  Debt can come in the form of credit cards payments, car payments, business or student loans, child support, medical bills, & other sources.  Mortgage lenders calculate applicant viability for a home loan based on taxed income, versus the expected increase in financial obligation that the assumption of a new mortgage would add. It is a proven tool in determining how likely the lender is to get back their money back with interest, essentially weighing the overall associated risk on a particular loan.

 2. Credit Score & Credit History 

Simply put, the higher a credit rating is, the lower the interest rate one will pay on a mortgage bill every month.  A loose breakdown of credit scores & corresponding loan types can be seen below.  On occasion, if a credit score is deemed lacking, it can counterbalanced by a larger down payment. FICO scores of 550-600 are seen as being on the lower end of the qualifying spectrum (which would result in a higher APR), but are usually enough to secure a loan if sufficient income is shown in recent tax filings.  Scores 700 & over are likely to receive much more competitive rates from lenders.

 3. Personal & Economical Factors 

Coming to the large life decision of owning property is not to be taken lightly.  Settling on which side of town you prefer, how large a living space is needed (now & in the future), which amenities are sought, dealbreakers & deal-makers, each take time to contemplate- they also must be aligned with reality.  A handful of obligations & new responsibilities are going to land on a new homeowner's plate, but with these risks comes new wealth-building opportunities, a chance for passive income, & a popular path to financial freedom.  

 4. Down Payment Size 

The more funds that a buyer is able to furnish up-front, in the form of a down payment, results in the buyer not having to finance as large of a mortgage loan in order to purchase the house. Cash on-hand definitely improves your candidacy.

Let's say a property is valued at $250,000. A lender is more likely to approve a loan for $200,000 (80% of home's value) for a buyer that can pay $50,000 (other 20%) up-front on a down payment, than they would be in offering a loan to a buyer who could only furnish $10,000 down (4% of home's value), and needs to finance the remaining $240,000 (96% remaining). That being said, conventional loans only require a 3% down payment, if all other loan requirements are met, so down payment size certainly isn't everything.

 5. Housing Market Conditions 

The housing market, whether analyzing on a national or local level, is prone to change.  This change can be spurred by economic prosperity/recession, changing demography, global pandemics, housing market legislation, presidential administrations, & other integrated facets of the globalized world.

It shifts between buyers markets, sellers markets, & fair markets.  A buyers market may be brought about by decreasing home prices & a stockpile of homes available on the market, giving the buyer leverage when putting in offers. A sellers market is the opposite, & is characterized by low inventory volumes leading to higher priced homes alongside shorter times spent on the market, as well as less seller contributions. A fair market is one where a buyer's & seller's overall advantage is balanced.