Things to Know Before Requesting a Home Loan

Lenders look at certain items before approving a loan.

1. Your current financial situation (Click Here to use our budgeting tools)

• Your gross monthly income - This is your monthly pay before taxes and any other deductions. When you are paid an annual salary, divide this number by 12 to calculate your monthly salary. If you are paid an hourly rate and work 40 hours each week, multiply 40 hours x 52 weeks/year and divide that number by 12 months to get an average of your monthly earnings. If you are self-employed or work on straight commission, you will need to add your total income earned over the last two years and divide that number by 24 months to calculate your average monthly income.
• Your New Monthly Payment - The payment that you would be making with your new home loan. This includes taxes and home owners insurance (and also mortgage insurance if your down payment is less than 20%).
• Other debt - All of your debt payments each month need to be added up. This includes loan for cars, credit card debt, student loans, and any other debt you may have. The total of all your monthly debt payments plus your mortgage payment amount equals you total Debt used to calculate what size loan you can qualify for. This number goes into a formula call Debt-To_Income ratio (DTI). Total monthy Debt payments divided by your total monthly gross Income equals your DTI. Most loans require that no more than 43% of your gross income be used for housing expenses. Some mortgage  loans allow up to 50% (or sometimes more) if you have good credit.

2. Your Credit Standing or History
Lenders need to assess the risk of lending money to you. They do this by looking at your credit history. These can include histories on:

• Apartment or Home Rental Payment
• Credit Cards
• Installment Payments
• Current and Previous Mortgages
• Payments on Revolving Accounts

Many lenders use a type of credit scoring based on FICO (Fair,Isaac, & Company) guidelines. This scoring method, although beginning in the early 1980's, has really grown in popularity since 1994. Your credit score is based on the following factors:

• Payment History
- Late payments, bankruptcy,collections
• Outstanding Debt
- Your current and the ratio of total balances to total credit limits
• Credit History
- This is how long you have had credit
• Pursuit of new credit
- How many times you have applied or established new credit accounts recently
• Types of credit in use
- How many credit cards and other credit accounts or loans you have

Scores may be between 300 and 900 with 700 being the dividing line. A score of 700 or better means that you are most likely a good credit risk. This does not mean that you are not a good credit risk if your credit score is below 700.

What can I do to improve my score or standing?

• Try to always pay your bills on time - Don't worry, the scoring system takes into account that people miss a payment from time to time
• Also, negative effects on your credit rating are reduced over time
• Fix your credit report - Get a copy of your credit report and check it for errors. Frontier Mortgage can help you with this
• Keep your credit reasonable without too much cushion - As a rule, you should keep below 50% of your credit limit while not having too much cushion or available credit. Too much available credit makes you a higher risk
• Keep your requests for credit to a minimum - An excessive number of requests can be seen as a desperate need for money

3. The Collateral
Is the home you want to buy worth the money you are asking for? When you purchase a home, the home itself is used as collateral. It is important that the lender feel secure about the purchase. The value of your home is determined by an appraisal being performed. A licensed appraiser estimates the value of a home by comparing the home to similar homes that have sold recently in your area.