Pre-Qualified Homebuyer

Become a Prequalified Homebuyer

Few people have the cash necessary to purchase a home, so it is important to learn as much as possible about financing a home. Most homes are normally purchased with a mortgage loan. Understanding the requirements for obtaining mortgage loans are essential to becoming a pre-qualified homebuyer and ultimately purchasing a home. Most realtors will not show you the inside of a house that is for sell unless you can provide them with a pre-qualification letter from a financial institute. 

 

Mortgage Loan Requirements:

  • Personal Credit/Minimum FICO credit score of 620
  • Proof of income (over the last 2 years)
  • Secured loan 
  • Unsecured loan
  • Landlords' rental reference information (over previous 2 years)
Personal Credit

A FICO score is a credit score created by the Fair Isaac Corporation (FICO). Lenders use borrowers' FICO scores along with other details on borrowers' reports to assess credit risk and determine whether to extend credit. FICO uses five major components in the equation that produces your credit score.

Those five include:

1) Payment history (amounts to 35% of your score): includes pay on times, whether you pay your full balance, minimum, or somewhere in between

2) Balance (30% of score): considers how much of the credit you’re allowed how much you use, if you exceed the limit, are you considered a high risk and are you often penalized. Using less than 30% of your total credit limit (less than $300 of $1,000 card limit), would make you a safe borrower and get a positive rating.

3) Length of credit history (15%): The longer you have an account, the more your score increases.

4) Credit mix (10%): FICO likes to see a mix between credit cards, mortgages, and auto loans … as long as you can afford them! Don’t take out another loan in hopes it will improve your score. This category doesn’t count enough in the overall equation.

5) New credit (10%): It’s OK to occasionally open a new account, but if you are applying for several accounts in a short period, you are a risk, and your score will reflect that. Any time you apply for new credit, the lender will pull your credit history. Every time this happens, your score will go down. Only open them when you have a lack of positive credit.

Business Credit

Business owners must avoid ruining their business credit, it's not like personal credit, it can't be restored. Treat your business credit as though it is as precious as gold. Your business social security number is your Employment Identification Number (EIN).

Proof of Income

To verify your income, your mortgage lender will likely require a couple of recent paycheck stubs (or their electronic equivalent) and your most recent W-2 form. In some cases, the lender may request a proof of income letter from your employer, particularly if you recently changed jobs. You can no longer buy a house without proof of income. You have to prove you can pay the loan back somehow. But there are modern alternatives to stated income loans. For instance, you can show “proof of income” through bank statements, assets, or retirement accounts instead of W2 tax forms (the traditional method). 

How long you have to be at a job to qualify, by mortgage type:

 

 Loan Type                                                          Employment Length Required

Conventional: Two years of related history.   Need to be at current job 6 months if applicant has employment gaps

FHA loan: Two years of related history.           Need to be at current job 6 months if applicant has employment gaps

 

Secured Loan

A secured loan is a loan backed by collateral—financial assets you own, like a home or a car—that can be used as payment to the lender if you don't pay back the loan. The idea behind a secured loan is a basic one. Lenders accept collateral against a secured loan to incentivize borrowers to repay the loan on time. Secured personal loans may be preferable if your credit isn't good enough to qualify for another type of personal loan. In fact, some lenders don't have minimum credit score requirements to qualify for this type of loan. On the other hand, secured personal loans are riskier for you, because you could lose your asset. A secured loan is a loan connected to collateral. A collateral is something of value like a car or a house or equity shares. A lender has the right to take possession of the collateral if you fail to repay the loan as agreed. The most common examples of secured loans are car loan and a mortgage loan. 

For example, if you're borrowing money for personal uses, secured loan options can include:

  • -Vehicle loans
  • -Mortgage loans
  • -Share-secured or savings-secured Loans
  • -Secured credit cards
  • -Secured lines of credit
  • -Car title loans
  • -Pawnshop loans
  • -Life insurance loans
Unsecured loans 

Unsecured loans are loans that aren't backed by an asset such as a car or home. They include student loans, personal loans and revolving credit such as credit cards. Unsecured loans don't involve any collateral. Common examples include credit cards, personal loans and student loans. Here, the only assurance a lender has that you will repay the debt is your creditworthiness and your word. Unsecured loans are safe if they come from a bank, credit union or reputable online lender that checks your credit, fully discloses the costs and terms of the loan, and takes steps to ensure the loan won't overwhelm your finances. The risks have to do with your ability to repay the loan and the impact on your credit. Unsecured loans allow you to borrow money for almost any purpose. You can use the funds to start a business, consolidate debt, or buy an expensive toy. Lenders vary in their requirements for borrowers. A good credit score (above 689 FICO), low debt-to-income ratio and a credit history of at least a few years will help you qualify in most cases.

Unsecured loans typically range from $1,000 to $100,000, which you can use for a range of purposes. In general, annual percentage rates (APRs) range from about 6% to 36%, and loan terms often extend from two to seven years.

Some lenders tailor their loans to bad- and fair-credit borrowers, so you may have options, even with less-than-desirable credit. You can pre-qualify to see what loan rates and terms you could qualify for.

Landlord(s) Rental Reference(s)

Tenants may need to provide a landlord reference/reference to prove to a financial institution that they have been fiscally responsible tenants. Paying rent on time consistently prepares tenants for timely mortgage payments and successful homeownership. It should take tenants anywhere between 2-5 years to establish good credit, save money for down payment and do all of the things required to obtain a mortgage. If a person can maintain an apartment for over 5 years, they can maintain a home mortgage loan for 30 years. The only thing holding them back is fear. Spending over 30 years renting because of the fear of the responsibility of homeownership will only benefit the landlord(s) who you rent from over that time period.

 

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