While many first time home buyers pay much more in rent than what their potential mortgage could be, they can still be denied a loan when attempting to purchase a home. When I work with first time home buyers the biggest concern they have is whether they are financially qualified to purchase a home. I hope that the following post will help shed some light on how to successful qualify as well as help you plan accordingly.
When applying for a home loan all of your financials are put under the microscope and evaluated. There are three basic areas that lenders look at when giving you an approval on a home loan.
One, your credit score. Lenders need some sort of measurement to assume your financial responsibility to give them confidence; they do that through a credit score. A requirement that lenders have is that all three credit bureaus (Equifax, Experian, and TransUnion) provide a score. If you do not have enough credit history, it is likely that one or two of the bureaus would NOT report a score. If that is the case, it means you do not have enough lines of credit and need to open up a line of credit, like a credit card. Now assuming all three bureaus provide a score, and your average score is under 620, you can likely not qualify at all for a home loan. Above a score of 620, you will have satisfied the requirement of a credit score. Of course the higher the score, the better. Higher scores yield lower interest rates. If your score is above 740, you will be in the best position to seek and negotiate low-interest rates.
Two, how much liquid cash you have, e.g., money available in your bank account. Lenders care about this for a few reasons. They need to know where your down payment is coming from and require evidence of those funds. For example, you are buying a $400,000 home and are putting 3.5% down ($14,000). If a lender looks at your bank statement and sees that you only have $8,000 available, they will likely not approve you for a loan even if you meet the other requirements. Not only in this situation you, as the buyer, do not have the $12,000 for the down-payment but you also do not have funds to cover the closing costs which add roughly $5,000 - $8,000 (in this situation). Now assume it is the same situation but you as the buyer have $100,000 in your savings account. Clearly, you have enough for your down payment and other costs. The lender would not worry at all and you would easily fulfill this requirement.
Three, and arguably the most important, your job and job history. If you do not have a job, you will not qualify for a loan, period. Assuming you are working, you will need to have a history with the company/industry for at least two years, typically. For example, if you worked as a software engineer at Microsoft starting January 2015 and transferred to software position at Amazon in January 2016. Lenders will count the work you did at Microsoft towards the two years of work history because the work is in a relevant field. On the other hand, assuming in January 2015 you took a job as a sales associate at Nordstrom and then took the software job at Amazon in January 2016, a lender will scrutinize your job history. They would state that the time at Nordstrom cannot be used to qualify you because you have completely changed industries. The reason lenders scrutinize job history is because they want to be confident that you can hold a job and consistently pay your mortgage. In their eyes, the longer your work history in an industry (and company), the less risk you pose when borrowing (showing you can hold a job), which in turn gives them more confidence that they will be paid.
If you are thinking about buying a home in the next year or two, these three points are something to seriously start thinking about. If you already have met these qualifications, you are in great shape and we should grab coffee and discuss your goals! If you have not, I would be happy to grab a coffee and talk through a plan to achieve them.
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