Many first time home buyers ask themselves – what do I need to buy a home, and how do I qualify for a mortgage? Few people have enough money to purchase a house outright and must finance the remainder of the purchase in what is known as a “mortgage.” Personally, I find mortgages to be a necessary evil, but I still plan to pay off our mortgage much earlier than the amortization schedule calls for.
Typical mortgages last anywhere from 15 to 30 years. The interest rate on the mortgage is decided by the particular lending institution, although the rate is heavily influenced by federally set guidelines. In general, mortgage rates vary between 3 to 10 percent. In recent years, the mortgage rate has been historically low.
What Do I Need to Buy a Home?
To be approved for a mortgage, the borrower must meet certain income requirements and have a decent credit score.
There are two major financial factors a borrower must meet in order to become approved for a mortgage:
- Debt to Income ratio (DTI)
- Loan to Value ratio (LTV)
The DTI reflects the percentage of income a borrower must pay toward his debts. Most conventional financing ratios are 28/36.
If a borrower has an annual income of $50,000 and must meet a DTI of 28/36, this means he must calculate his total monthly income and then determine how much money he pays toward his debt.
Based on his salary he makes $4,166 dollars per month. He is allowed to spend $1,166 on housing expenses and a total of $1,500 on housing expenses and recurring debt combined to meet the DTI of 28/36. If he exceeds these figures then he will not qualify for the loan.
The loan to value ratio reflects the amount of money the borrower needs versus the value of the house itself. If a house costs $300,000 and a borrower requests $250,000, this is a LTV of 83 percent. In most cases, lenders prefer LTV ratios that are below 80 percent.
Some lenders will grant borrowers an LTV of up to 105 percent regardless of their income requirements, but these loans are usually based on prior service in a particular government body or association with a specific group.
The borrower who is buying a house can help both her LTV and DTI percentage by engaging in sensible financial practices. She should make sure her recurring debt is locked in at a low interest rate so that she can focus on paying it off sooner in order to lower her DTI score.
She should also implement a savings plan each month that will allow her to accrue enough money to create a down payment. The larger her down payment, the less money she will need to request from a lender, which will correspondingly lower her LTV.
Borrowers should also be prepared for the confusing blizzard of paperwork that accompanies a mortgage application. In particular, they should watch out for non-refundable application fees.
Some lenders will charge $500 or even $1,000 dollars to process an application. If the application is not accepted, the institutions may be entitled to hold onto this fee. Other institutions will return the fee if the borrowers do not qualify. In either case, borrowers should understand what the policy on the application fee is before beginning the process.
If you still find yourself wondering, what do I need to buy a home, you should consider hiring a Realtor to guide you though the process.