Getting a home loan is a relatively easy thing to do. You must follow some eligibility criteria and use a home loan eligibility calculator.
Check Your Credit Reports
To qualify for a home loan, you need good credit. Therefore, an essential part is having a solid credit score—a number representing your creditworthiness. The higher your score and the better it compares to the average American borrower’s score, the more likely they approve your loan at a competitive interest rate.
Credit scores fall into different categories based on how they were calculated. And what they mean: Good (700+), Excellent (740+), Very Good (720+), or Fair/Average (660-719). If you have any derogatory information on your credit reports, such as late payments or bankruptcies, that will negatively affect your credit score. And make it harder for you to qualify for all types of loans, including mortgages.*
The first step to getting approval for a mortgage is checking your credit reports from three major reporting agencies: Equifax®, Experian®, and TransUnion®*. Each agency has its way of calculating scores. But generally speaking, the higher these numbers are compared with others in their respective brackets—the better off you’ll be when applying for loans such as mortgages.
Calculate Your Debt-To-Income Ratio
To calculate your debt-to-income ratio, you’ll need to know four things:
- Your monthly income
- Your monthly expenses (rent, utilities, food, etc.)
- The number of debt payments you have each month (student loans, credit cards, and any other revolving debts)
- The total amount of acceptable DTI ratios for the loan type. For example, an FHA loan has a maximum DTI ratio of 50 percent, while VA loans have a maximum DTI of 36 percent. Gather this information from lenders to determine how much money is left over after paying your monthly bills and decide whether or not it meets their requirements.
Match Your Applying Amount with the Current Market Value
How much should I borrow? The answer will depend on the value of your property. There are three possible scenarios:
- If you are purchasing a home with less than 20% equity, you should only take out as much money as your home is worth. It will help ensure you have enough money to make improvements and repairs to your home if needed.
- Suppose you are purchasing a home with more than 20% equity. In that case, you should have enough money available to cover closing costs (which can vary), unexpected expenses during the process (such as unexpected property repairs), and any other costs associated with moving into a new house (like furniture). Ensure this happens without taking out too large of an initial loan amount. Try this rule-of-thumb: Take 30% off of what the house appraised for at purchase time and use that number as a maximum allowable loan amount from which all other factors are calculated. It includes taxes owed per month based on interest rate along with additional fees associated with applying for financing such as credit score checks etc. Mainly if necessary, upfront cost estimates were hard to get, or unavailable prior due diligence efforts made prior were unsuccessful. Due diligence efforts made prior resulted negatively because results didn’t match expectations. Expected results accurately reflected actual needs that presented themselves unexpectedly. Sometimes things happen suddenly.
LTV ( Loan to Value Ratio )
The loan-to-value ratio is the ratio of the loan amount to the value of the property. And it’s important for lenders because it gives them an idea of how much risk they’re taking on when they make a mortgage. The higher your LTV, the more likely you’ll default on your payments and lose money for them.
So how do you calculate LTV? It’s simple: divide your loan amount by your home’s value. That will show you what percentage of equity (or collateral) exists in a particular house purchase if a lender gives themself over 100% financing (which is usually not possible). For example, if someone buys a home with a $150K down payment ($150K), but wants to borrow another $225K (in total), then their Loan-to-Value Ratio would be 75%. It means that if this person had no other assets or income sources besides their wages coming from this job (which may not be enough), then there would only be 20% left over after paying off principal debt. Which could eventually become available as cash flow each month.
Calculate your DTI and LTV
To qualify for a home loan, you must know your DTI (debt-to-income) ratio and LTV (loan-to-value) ratio.
- A higher DTI ratio will reduce the amount of money you can borrow.
- The lower the DTI ratio, the better. It would help if you aimed for a DTI below 36%.
- A higher LTV will reduce the amount of money you can borrow.
- The lower your home loan payments relative to your income, the better it is to qualify for a new mortgage loan or refinish an existing one.
Home loan qualification is not challenging; you must follow some eligibility criteria and use a home loan eligibility calculator.
A home loan eligibility calculator will help you determine if you qualify for a home loan. An online home loan eligibility calculator is the best way to determine if you qualify for a home loan. It will take some of the guesswork out of the equation. And give you a clear idea of whether or not you can get approved for a mortgage before talking to any lenders or real estate agents.
You can also check your credit score. Check the debt-to-income ratio and other factors such as employment history, length of current residence, and any outstanding debts. Or bills that might affect the amount of money available from your bank account(s).
As you can see, qualifying for a home loan is not that complicated. All you need to do is follow some basic steps and stay organized. As long as you have an income source, a down payment, and a good credit score, you should be able to qualify for your own home in no time!