Nothing spells stability like a house does. This is why it is the ultimate goal of every wage-earning, tax-paying American to own his own house. All too often, the easiest way to own a house is through mortgage. How does mortgage work? You secure money from home loan lenders to buy a house.
There are two things that lie close to home loan lenders’ hearts. The first is profit. The second is your ability to pay. Every now and then, there are home loan lenders who truly care about the well-being of their clients, but this type of home loan lenders is few and far in between. In dealing with home loan lenders, you must keep in mind that they are running a business and the bedrock of every healthy business is return on investment. Therefore, home loan lenders put high premium on taking care of business and what better way to do this than by ensuring that everyone who takes out a mortgage is able to meet payments on time?
The Importance of Credit History
Home loan lenders look at your credit history to gauge your ability to pay. Your credit score speaks volumes about the kind of debtor you are. A credit score is a standardized measure used by home loan lenders to assess potential borrowers’ ability to discharge debts. 900 is considered an ideal score while scores of 620 and above will qualify you for a conventional mortgage. Should your credit score fall below 620, you will have to utilize more creative means for financing and bear with higher interest rates.
Dealing with Poor Credit History
Credit problems, however, do not disqualify you from getting a mortgage from home loan lenders. It will be more difficult for you to take out a loan, but the operative word here is difficult, not impossible.
If you have poor credit history, what you do is keep your record clean for at least two years. Pay off those credit cards and car loans. Such payments will reflect favorably on your credit history and would make you less of an investment risk to home loan lenders.
The Significance of Debt-to-income Ratio
Home loan lenders consider not only your credit history but also your debt-to-income ratio. Your debt-to-income ratio is the money you make each month pitted against the debts you pay off monthly.
As a rule of thumb, the mortgage you can get will be somewhere between 2.5 to 2.75 times your income. If you make $90,000 a year, for example, you might be pre-qualified for a mortgage of $225,000 to $247,500.
In determining your debt-to-income ratio, home loan lenders consider your car payments, student loans, and credit card balances. If your monthly income barely meets your monthly expenses, your home loan lender will naturally require you to pay a higher interest rate. The logic for this is simple. Even without payments on your house, you are already having difficulties making ends meet. Thus, you represent high-risk investment to home loan lenders. To justify their funding of a high-risk investment, they will have to charge you more. This is the only way your mortgage will appeal to them, despite all associated risks.
In taking out a mortgage from home loan lenders, you will need both patience and cunning. More importantly, you will need to make decisions. Just be sure to gather all the information you need. You cannot go wrong with informed decisions.