Tuesday, November 16, 2010

Apply for a Home Loan: The Ideal Mortgage Loan Profile


When applying for a home loan, you ideally want to get the lowest rate and best terms possible.  When the bank or a mortgage broker is taking your application, there are 4 main areas that are points of interest:

1. FICO Credit Score: Your credit score is indicative of your current liabilities, past payment performance, and public record (including bankruptcies).  The higher the score, the better you qualify as it demonstrates trustworthiness to the lender.  Ideally, you want a score of 740 or higher.

2. Income: The amount you make on a monthly basis is a baseline for how big of a loan you qualify for.  Ideally, your PITI (principal-income-taxes-insurance) mortgage payment should be no larger than 30% of your pre-tax income.  Additionally, your total liabilities (credit card minimum payments, car payments, etc) and your mortgage payment should not exceed 50% of your pre-tax income.  This is known as the Debt to Income (DTI) ratio.  The lower your DTI, the better.

3. Assets: Lenders want to see that you have at least 3 months of mortgage payments in the bank in case of an emergency.  Ideally, you want to have at least 6 months of reserves.  The more cash you have, the better.  Other properties, retirement funds, stock portfolios, etc. contribute to your assets. 

4. Loan to Value (LTV) Ratio: The lower your LTV, the better.  Your loan to value ratio is the ratio of the size of the loan compared to the appraised value of the home.  For example, if your loan is for $400k, and the home is worth $500k, the LTV ratio is 80%.  Ideally, you want at most 80% LTV; you can achieve this by putting a down payment on the home.  The lower the LTV, the less risk the lender has when loaning you the money. 

If you are strong in these 4 areas, you should have no problem qualifying for a mortgage with low rates and excellent terms.

39 comments:

  1. I'll remember this when I buy a home!

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  2. this is a very informative post :)

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  3. How old should you be before buying a house? I'm only 22, but I know people who are 24 looking for houses....

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  4. Especially if you sleep with Barney Frank.

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  5. hey, good tip, I'm thinking in buying a house when I finish college. Thanks =)

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  6. I would love to be a homeowner soon... after grad school.

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  7. I love all the money on this blog!

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  8. very good information on this blog

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  9. This is excellent information to keep on hand.

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  10. I wonder how many people manage to take out a mortgage without it screwing them over later.

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  11. you can buy a house at 18. just depends on your finances. in truth, you can buy a house at any age, though typically the younger you are less than 16, say, the more likely it is for the home to be purchased via a family trust, co, or an organization rather than the individual.

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  12. ehh i probably won't be buying anytime soon

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  13. or you chop some trees and make you one!

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  14. I don't plan on buying at all but thanks!

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  15. i am for more bakcward for having a house

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  16. And that's why I'd prefer to just save up and buy a house in one go.

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  17. Applying for a home loan right now might be a bad idea though.

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  18. nice tip, now to get the scratch.

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  19. no house for me anytime soon but thanks for the info!

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  20. my goal is to have my LTV ratio as low as possible

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