Are you thinking about buying your first home or another property for rental income? Members First is here to lend a helping hand with the home buying process, from advice to helping you finance the purchase of your new home.
You'll need more than cash to purchase your home. So, before you sign on the dotted line and start unpacking your household goods, here's assets you'll need in order to qualify for a home loan with a low interest rate:
- Steady Income
Steady income shows that you are capable of affording monthly mortgage payments. When you apply for a home loan, you may be asked to provide a signed letter from your employer stating your position and salary, two years worth of pay-stubs, or two years of income tax returns.
- Low Debt-to-Income Ratio
Your debt-to-income ratio is the ratio of your monthly debt obligations (student loans, car loan, credit card balances, personal loans, etc.) to your gross monthly income. Carrying a high debt-to-income ratio will make it harder to qualify for a home loan. It is suggested that your debt-to-income ratio is no more than 43% of your total gross income. So, before you begin your house hunt, work to pay off current debts and lower your debt-to-income ratio.
- Good Credit Score
A good credit score is an important way to gauge how you've managed credit, loans, debt in the past, and if you pay your bills on time. Credit scores fall on a scale of 300 to 850. While a score that falls between 670-739 is considered good, a score of 749 or higher will ensure that you get the best rate possible.
You are allowed one free credit report each year from each of the three primary credit reporting agencies (Experian, TransUnion, and Equifax). To request your free credit score, visit annualcreditreport.com. So, while you're saving for a down payment on your future home purchase, check your credit score and work to improve it. Pay off debt, pay bills on time, and don't open or close any lines of credit (e.g. store credit card, personal loan, etc.).
- Cash For A Down Payment
The money that you plan to spend as your down payment on your home should be in the form of cold, hard cash in an account that you can easily access (not a CD or account where you pay a fee for the withdrawal). It may be tempting to put all or part of the down payment on a credit card, but doing this will affect your debt-to-income ratio, lowering your creditworthiness.
In order for you to receive the best loan rate and avoid paying PMI (Private Mortgage Insurance) on a conventional loan, you need to save up for a down payment of at least 20%. With other strong elements — like low debt-to-income ratio and excellent credit score — you may be able to put less money down and still get a good rate. However, you'll ultimately be taking out a larger loan and will pay more interest on the larger principal over the life of the loan.
- Cash For Closing Costs
Be sure to also put aside some of the cash you've saved up for paying closing costs. Closing costs include loan origination fee, title search and recording fee, appraisal fee, inspection fee, property taxes, etc. While these costs can vary, they typically fall between 2% - 5% of a home's purchase price.
While you can sometimes roll these costs into your home loan, it's best if you're able to pay them up front with cash, so you can avoid a higher monthly mortgage payment and possibly a higher loan rate. You may also be able to pay these fees with monetary gifts from relatives or by negotiating with the seller to pay the closing costs — especially if they are eager to sell.
Ready to purchase your new home? We're here to lend a helping hand.
All loans are subject to credit approval. Rates and terms are based upon individual credit worthiness. NMLS #405711
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