How to Qualify for a Home Loan in California

Every time clients contact you about buying a property, it’s a new, exciting opportunity both for them and for you. For them, it’s all about finding a new home — and for you, it’s about building relationships and helping good clients.

Of course, although your expertise lies primarily with the properties you represent, it’s not uncommon for clients to come to you for advice on how to qualify for a mortgage. To help you — and your clients — here’s a quick overview of factors that lenders consider.

Debt-to-Income Ratios

Before approving homebuyers for a mortgage, lenders will want to know if their income is sufficient to cover any existing debt, as well as the added burden of a home loan. That’s why, as Zillow explains, lenders look at two debt-to-income ratios:

  • The housing ratio or front-end ratio: This is the projected monthly mortgage payment — including any other home ownership costs — divided by the clients’ gross monthly income. Generally, it shouldn’t be more than 28 percent.
  • The debt ratio or back-end ratio: This is the clients’ total monthly revolving debt divided by their gross monthly income. In general, this should be at most 36 percent.
    Note that for individuals with high incomes, lenders might be willing to consider higher debt-to-income ratios.

Credit Report

Your clients’ credit reports are another major consideration for lenders. According to Equifax, one of the three largest consumer credit reporting agencies, credit reports include information about credit accounts such as credit cards, personal loans, car loans and student loans.

They also contain inquiry information. There are hard and soft inquiries. Hard inquiries indicate that a potential lender — such as a credit card company — has reviewed the clients’ credit histories. These hard inquiries are important to other lenders. Soft inquiries aren’t visible to other lenders and include things like inquiries made by companies to offer preapproval for credit cards, as well as clients’ own requests to review their credit reports.

Finally, credit reports can also include information about accounts that have gone into collection, as well as bankruptcies.

All of this information together adds up to provide a credit score. For a conventional home loan, the minimum credit score is 620, according to Lending Tree. However, the higher the score, the better the chances of the clients being approved for a loan.

Employment History

Mortgage lenders like to see a consistent work history, since a consistent income is essential to reducing their risk. As a rule of thumb, clients should be in the same job — or at least the same industry — for at least two years before applying for a home loan.

Down Payment

Your clients should be able to contribute a down payment of at least 15 percent of the home’s sale price. If they can afford it, 20 percent is even better. The higher the down payment, the less they’ll eventually have to pay in interest over the total life of the loan.

All things considered, it’s always wise to make sure your clients know the requirements for qualifying for a loan when they first start looking at homes. That way, when they find a property they like, they’ll know whether they can realistically afford it. And equally important, the time and effort you invest will be more likely to yield a fitting ROI.

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