Mortgage Qualifying Tips for Houston Home Buyers
Being a first-time Houston home buyer can be exciting – and a little stressful! But don’t worry – there are two things you can do to put yourself in position for success! The first is to focus on qualifying for a mortgage. The second is to choose a KW Energy Corridor Agent who will guide you throughout the home buying process!
To help you get started right away, let’s discuss mortgage qualification. When considering your mortgage application, lenders look at the “four C’s.” They are: capacity, capital, collateral and credit. Here’s what they cover!
Capacity refers to your ability to repay the loan. Your lender will examine these things:
- Employment history
- Monthly debt payments
In evaluating capacity, lenders calculate your “debt-to-income ratio” or DTI. Your DTI is calculated two ways: front-end DTI, and back-end DTI.
Front-end DTI shows the affordability of the mortgage payment itself. The lender calculates your projected mortgage payment against your gross monthly income. For example, if your mortgage payment is $1,400 a month, and your gross monthly income is $5,000 a month, then your front-end DTI ratio is 28%. ($1,400 divided by $5,000 = 0.28.) 28% is a desirable ratio. A different front-end DTI could be allowed, depending on your mortgage type and overall circumstances.
The back-end DTI looks at all of your debt payments, plus your mortgage payment, against your gross monthly income. Using the example above, if you had a car payment of $250, in addition to the $1,400 mortgage payment, your back-end ratio would be 33%. ($1,400 mortgage, + $250 car payment, = $1,650 total monthly debt payments. $1,650 divided by gross monthly income of $5,000 = 0.33.)
The less debt you have, the better! Generally, your back-end DTI shouldn’t exceed 38% to 40% of your gross monthly income. Depending on your mortgage type and your creditworthiness, different DTI limits may apply.
Next, lenders look at your available capital, or cash-on-hand. This includes the down payment, checking and savings accounts, investment and retirement finds, and so on. (Down payment requirements vary by loan type; 3% to 3.5% down is the typical minimum. VA loans may not require a down payment.)
In reviewing capital, lenders also consider your cash reserves and overall savings habits. If your savings history is spotty, try setting up an automated savings account with direct deposit. Also take advantage of your employer’s 401k plan, and make regular contributions from each paycheck.
Collateral requirements basically mean that any home you purchase must have adequate value to secure the mortgage. The lender will require a third-party appraisal to be performed on the home you are purchasing.
Credit requirements vary widely by lender and mortgage loan type. The higher your credit score, the better! A consistent history of on-time payments, along with low debt burdens, are crucial to a strong credit score. Check your credit history for free at annualcreditreport.com. Obtain your credit score and learn about score improvement at MyFico.com.
You won’t face all these details alone! We’ll be happy to refer you to trustworthy, local mortgage lenders who will help you find the right mortgage for your needs.
KW Energy Corridor Team
11757 Katy Fairway | Suite 930
Houston, TX 77079