When a first-time home buyer is looking for a home, the process can be overwhelming. One of the first steps that he should take is to get pre-qualified for a mortgage with a lender or bank. In order to be pre-qualified, the borrower must fill out an application known as a Universal Residential Loan Application and allow the lender to process his application. The lender will look at several variables in order to determine the borrower's willingness and ability to repay the debt.
Credit Score and Report
The first major criteria that a first time home buyer must reach is the credit score requirement. For a conventional mortgage, his score must be above 620, however, for a government loan, such as a FHA, VA, or USDA loan, the credit score must be above 580. Additionally, the lender will look over the borrower's credit report to see if there are any liens, collections, judgments, or bankruptcies on the report. If so, those items will need to be paid in full prior to the mortgage closing for the borrower to be approved.
Debt to Income
The most important ratio that determines a borrower's ability to repay is a debt is known as the debt-to-income ratio. This is the total of all of the borrower's monthly debt payments divided into the borrower's total pre-tax monthly income. The lower the ratio, the better. The lender is looking for a borrower to have a debt-to-income ratio of less than 36 percent after the new mortgage payment is added into the debt. In the case of government loans, the borrower's debt-to-income ratio may be as high as 45 percent.
Loan to Value
The last ratio that a lender looks at to determine a first time home buyer's eligibility is the loan-to-value ratio. This is the total amount of the loan divided into the value of the home. The higher the ratio, the less equity in the home. The lender wants to see as low of a loan-to-value ratio as possible because the more built-up equity in the home, the less likely it is that a borrower will default on the debt.
However, with a first-time home buyer, lower loan-to-value requirements are available. In the case of some government loans, such as a VA or USDA loan, the borrower can have a 100 percent loan-to-value. However, most conventional loans require a loan-to-value of less than 95 percent.
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