Many home buyers, especially first-time buyers, spend no little amount of time wondering and worrying about qualifying for a home loan. But there are some things you can do to substantially increase your chances of qualifying – and that will go a long way toward reducing the stress and anxiety. So check out these 3 quick things to ensure you will qualify for a home loan in Boston.
1. Get Your Credit Score Up
The first step to take toward ensuring you qualify for a home loan in Boston (or anywhere else) involves your credit. You need to check your credit score and then work on getting it up if needed.
Most conventional lenders require a minimum credit score of 620 to 640. Some government-backed loans, however, will allow a score as low as 500. But the higher your credit score, the more affordable your home loan will probably be because you’ll get a better rate and better terms.
If, after checking your credit score, you find that it needs to be brought up, here’s what you can do. Make all debt payments on time and in full because credit is a heavily weighted factor in your credit score, 35% percent of the score. You should also try to reduce your total debt. Your debt in relation to the total amount of credit extended to you amounts to 30% of your score. And avoid making any large purchases on credit or opening new lines of credit prior to applying for a home loan.
2. Improve Your DTI Ratio
Another effective strategy to help ensure you qualify for a home loan involves your debt-to-income (DTI) ratio. Your mortgage lender will want to know that you have enough money coming in after paying debts so that you can make the mortgage payments, and your DTI ratio will tell them that.
To calculate your DTI, add up all your monthly fixed payments such as rent, car payments, credit card payments, and student loan payments. Then divide your total monthly expenses by your total pre-tax household income and then multiply that figure by 100.
The lower your DTI ratio, the better off you’ll be when it comes to qualifying for a home loan. Typically, mortgage lenders require a DTI ratio of 50% or less for qualification. If your DTI ratio is above that, then you can improve by reducing monthly payments and/or increasing your income.
3. Determine What You Can Afford
Knowing what you can actually afford in a home will also help you qualify for a home loan. You will be able to shop within your affordability range and so stay within your ability to borrow.
A good way to determine affordability is by using the 28/36 rule. This rule is related to your DTI ratio. A 50% DTI ratio, for example, means that you spend half your monthly income on debt payments.
According to the 28/36 rule, you want your “front-end” DTI – that is, only mortgage-related expenses – to be at or below 28%. And your “back-end” ratio – that is, your mortgage payments and all other debt obligations – should be, ideally, around 36%. Figuring exactly how much house you will allow you to stay near these percentages will allow you to know how much you can actually afford – and how much you can qualify to borrow.
If you exceed these percentages and your DTI is too high, then (as we indicated above), you’ll need to work on reducing or eliminating some of your existing debt. And keep in mind too that a monthly mortgage payment is only part of your home-related expenses. You will also have to pay for homeowners insurance, property taxes, HOA fees, and so on.
And Get Tips From a Boston Agent
Qualifying for a home loan, though, is only one piece of the puzzle. You will also have to find a home with a price or negotiate a price that falls within your price range and borrowing ability. That’s why working with an experienced Boston agent is so important. And we have the agents who can provide the assistance you’ll need. So when you qualify for a home loan in Boston and are ready to buy, contact us at (617) 657-9811.