Understanding Home Loans 101

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DO I QUALIFY?

So let’s get right down to the nitty gritty. You have decided maybe it’s time to stop renting and to lay down some roots. Great decision! There is a high correlation between homeowners and financial stability. In fact, Keeping Matters Current, says that, “Homeowner’s Net Worth will be 45 times great than renters.”

Think of every bank you know as a person, an investor, Mr. Wells Fargo, Mrs. Bank of America, Mr. Credit Union and so on and so forth. Mr. Wells Fargo has millions of people that he holds money for. These people give Mr. Wells Fargo money, based on his ability to help them meet their financial goals. In turn, Mr. Wells Fargo decides how much risk he is willing to take, in order to help them reach those goals. So you have to understand Mr. Wells Fargo’s and Mr. Credit Union’s goals differ based on their customer’s goals. Therefore, they have different thresholds of the amount of risk they are willing to take to help their clients reach those goals. 

This simple relationship is what creates the housing market. Both parties are willing to lend out the money given to them by their customers in order to make a profit. However, the investor’s “appetite for risk” may differ greatly and understandably so, one may be willing to accept more risk than the other in order to meet their customer’s needs. One of them may have more money than they are comfortable holding on to, so you will find that although you can be approved for a home loan in many places, the terms of the loan can differ greatly. 

Now realize that there are thousands upon thousands of these financial institutions in the country, so the process to qualify for a home loan can vary greatly. You may also find that some are willing to approve you when others are not. There are different types of home loan programs for different situations and locations but the details that these lenders use to determine your eligibility are generally very common. 

To earn an initial pre-qualification, you will have to provide information to the lender such as your employment history, your monthly income, your estimated credit score, and how much money you are willing to spend on a down payment. If you have a spouse or a co-borrower, the same information will be expected from them also. 

Next, they will dive deeper into the details and use the information you give them to create facts and figures like your debt-to-income ratio/s and the maximum monthly debt load you can afford. They will look at whether or not your credit score is subprime (below a 620, not a complete disqualifier but it will limit your options). They will look at how many credit lines you have open, how long they have been open, and your history of re-payment on them. They will look at your job stability and your length of employment. They have to make sure you stand to receive steady paychecks (This can create issues for small business owners and the way they report earnings, ask if you would like more info on this.). Altogether, there are many factors that are investigated to determine your loan worthiness. 

We don’t like to sugar-coat the truth so please understand that this process can be frustrating. In the long run, you will think your lender is invading your privacy. They will keep asking for more information as the process goes on. No one said that home ownership was easy, but nothing worth doing in life ever is right?

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