Home loan advice and understanding debt to income ratio
Home Loan Tips - 3 Things You Must Get Right
If you’re in the market for a home loan (mortgage), avoiding common mistakes will make the process smoother and the results much more favorable for you as the home buyer. There are three areas that cause people the biggest headaches when it comes to getting approved for home loans and getting the best mortgage rates possible. This article will help you sidestep those obstacles and get into the home of your dreams at a price you can easily afford.
650 Is The Magic Number
The first thing you must get right before you start searching for a home loan is your credit score. This is huge. A credit score below 650 tells a potential lender that you’re a bigger risk. That translates to a higher interest rate, which means a higher monthly mortgage payment. Ultimately, it means you’ll be paying a lot more for your house when the loan is finally paid off than if you’d gotten a lower APR at the start.
So, how do you raise your credit score quickly if it’s below 650? All of the following should be undertaken at least six months prior to beginning the home loan application process:
* Get a copy of your current credit report and correct inaccuracies immediately.
* Do not apply for any credit for at least six months prior to applying for a home loan.
* Reduce credit card balances so they are no more than 30% of the limit on each card.
* Do not miss any loan payments or make any of them late for at least six months prior to applying for a home loan.
DTI - Three Letters That Mean Everything
DTI stands for Debt-To-Income ratio, and it’s what lenders look at very closely when deciding if and how much to loan you to buy a home. DTI is derived by dividing your pre-tax income every month (averaged) by how much your combined payments are to make minimum monthly payments to creditors. The magic number for home lenders is around 30%. If your DTI ratio is at or below 30%, you stand to get excellent terms on your home loan. Lower your DTI by working hard to lower your credit card balances and to pay off any car loans and student loans before applying for a mortgage.
LTV - Three More Letters You Need To Know
LTV stands for Loan-To-Value ratio, and it refers to the amount you’re asking to borrow divided by the total value of the home in question. For example, if the home you want to purchase is priced at $100,000 and you want a mortgage for $90,000, your LTV score is 90%. In other words, you have $10,000 as a down payment. Home lenders typically look for LTV ratios of 80% or lower. This means that you can get a much better interest rate on your home loan if you either put more money down at the closing or buy a lower priced home.
Comment by Robert A. Brusca, PhD
