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Getting prequaified

Getting Pre-Qualified

If you have decided that homeownership is for you, the next step is approaching a lender to become pre-qualified.  A mortgage loan officer takes many variables into account when they pre-qualify a prospective homebuyer. Credit score, current salary, employment history, and current debt are major factors in the approval process. Below are basics to understand and questions to ask as you go through the process.

As you go through the process, it is important to note that lenders often pre-qualify a homebuyer for a loan amount that exceeds the comfort level of the borrower. It is the homebuyers’ responsibility to tell both the lender and the real estate agent if they wish to spend less than that amount.

If a buyer is pre-qualified, then the real estate agent knows that they’re serious about making a purchase.

Understanding Home Buying Ratios

Your home buying ratios, in combination with your credit or FICO® score, are the most important factors lenders consider when you apply for a home mortgage loan. Lenders use two common ratios to determine the maximum home mortgage loan amount they will allow you.

The first ratio lenders use compares your total monthly housing costs with your total monthly gross income. Your expected monthly housing costs, including mortgage principal, interest, taxes and insurance (PITI) should not exceed 28 percent of your income. PITI includes property taxes, hazard insurance and mortgage insurance payments. Keep in the mind that taxes and insurance vary from county to county.

The second ratio lenders use is your debt-to-income ratio (DTI). Your total monthly debt, including your expected PITI, credit card, and other loan payments, should not exceed 41 percent of your gross monthly income. The actual percentages vary by lender and home mortgage loan program, but keep in mind that your goal is to arrange a mortgage that best suits your needs without creating a financial burden.

Understanding Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) protects the lender from the expense of foreclosing on the property if you default. If you buy a house with a conventional mortgage, and you make a down payment of less than 20 percent, in most cases you will be required to pay for PMI.

The insurance benefits the lender, but the borrower pays for it. The premiums for PMI are added into the borrower’s total monthly mortgage payment. The cost of PMI varies, depending upon the size of the mortgage and the percentage of the down payment.

Understanding Mortgage Loans

There are a number of loan products available to low- and moderate-income buyers. The majority of loans that these homebuyers use come from the following sources:

Interest Rates

Another factor that affects the amount you can borrow is interest rate. The lower the interest rate, the higher the amount you can borrow. The higher the interest rate, the lower the amount you can borrow.

Buyer Beware! Recognizing Predatory Lending Practices

Predatory lenders take advantage of consumers with credit problems and those who fail to safeguard their own financial transactions. These lenders charge extremely high fees and interest rates. A loan from a predatory lender will cost you much more throughout the life of the loan and—in extreme cases—could lead to foreclosure on your home. Predatory lenders take advantage of those borrowers who are not able to secure lending from traditional financial institutions.

Remember that you are responsible for protecting your own financial well-being. Do not transact any business with a lender who pressures you sign documents you haven’t read or don’t thoroughly understand.

Predatory lenders often employ very aggressive, and sometimes deceptive, marketing campaigns. Their goal is to reach those individuals who, for any number of reasons, would be more likely to agree to apply for a loan. Once they have identified a potential customer, they try to reach them by mailing, phoning, and even visiting them in their homes to encourage them to take out a loan.

This initial loan is sometimes just an entry point into the financial life of the homeowner. The loan has an artificially high interest rate and monthly payment, so that the predatory lender can offer an opportunity to refinance it, along with other debts, with another loan. The predatory lender’s ultimate goal is to get the homeowner to refinance their first mortgage with them.

Move to Step 5 of the home buying process

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