If you are interested in buying a home or business, you typically must first qualify for a mortgage in order to afford the real estate that you want to purchase. You will need to consider such issues as affordability and pre-qualification for a mortgage loan. In deciding whether you are able to afford a mortgage, you will have to consider your income, expenses, and credit history. Prior to considering whether you qualify for a mortgage, you must first determine the amount of debt you can afford. The most efficient way to do this is to take into account your monthly income because you will be paying your mortgage on a monthly basis. The conventional rule is to apply one-third of your monthly income towards your mortgage payment.
The Importance of Your Credit Score
While there are some potential buyers and lenders for whom 45% of your monthly income applied to a mortgage is acceptable, those who are more cautious would prefer that your mortgage payment be no more than 25% of your monthly income. When trying to qualify for a mortgage, keep in mind that your lender will initially check your credit score, or FICO score, from the major credit reporting agencies, which are Equifax, Experian, and TransUnion. If your credit score is high, you have a better chance of obtaining a loan, and your interest rates are likely to be lower.
Factors that Determine Your Credit Score
Since your score is a measure of your credit risk, a higher score implies that you will be perceived by banks as being less of a risk, and, thus, the bank will be able to offer you more favorable terms for the loan. The main determining factors of your credit score include:
- Your outstanding debt
- Your ability to make timely payments
If you do not have a lot of outstanding debt, and you are in the habit of making payments in a timely fashion, you will likely have a higher credit score. Conversely, if you are in a lot of debt, and you habitually make late payments, you will likely have a lower credit score.
Loan Pre-Qualification and Pre-Approval
Upon determining the type of loan you will need, you can obtain a pre-qualification letter from your lender. While such a letter does not guarantee that you will be approved for a loan, it gives you a certain loan amount for which you will likely be approved, and you can start looking to make a purchase with that loan amount in mind. After checking your credit, and considering your financial status, your lender may decide that you can be granted a loan for a certain amount.
Be aware that a pre-approval of a loan does not guarantee that you will be given one. Prior to being granted a loan, there are other factors that must be considered by your lender, including:
Should I Consult an Attorney?
If you have any questions or concerns regarding legal issues during your purchase of a home, you should consult a real estate attorney, who can advise you as to which course of action to take should any legal problems arise. While the majority of states do not require you to hire a real estate attorney to handle the purchase of a home, it would be beneficial for you to have legal representation in the event that there are liens or other encumbrances on the property.