Do you have a down payment? Want a no-money-down loan? Are you self-employed? Follow these tips to making sure you’re ready to buy a home.
There are plenty of reasons why owning a home is one of the most sound investments you can have. Even still, there are some out there who think
buying a home is a lot like buying a car. You know, walk on the “lot”, pick out what you want, haggle the price a little, and drive home…right?
Actually, the two couldn’t be more different. But before you get into the PURCHASING part of home buying, it’s best to make sure you’re ready to afford a home. What does it take? What do lenders look for? Can you buy a home when you’re self employed?
First up, your finances.
It’s one thing to have a good credit score, and it’s another to know that the money you make is enough to afford a monthly mortgage payment. Assuming your credit is in good shape, lenders also look at your DTI, or Debt-to-Income ratio. Very simply, this is an easy bit of math where you divide your monthly recurring debt (Car payments, credit cards, alimony if applicable, student loans, personal loans, rent/mortgage payment) by your combined gross monthly household income. The result should come in the form of a decimal point. Of course, from there, basic math says that you move that decimal point over two spaces to the left, and the answer turns into a percentage. So let’s say you have a monthly combined gross income of $7,000. Your recurring debt expenses are $2,500. Divide 2500 by 7000 and the answer is (rounded up) .36, or 36 percent DTI. Some lenders will allow mortgages when a borrower’s DTI is as high as 42%, but most like to see it between around 28-35% to offer the best rate.
From there, your lender will determine your best monthly mortgage payment that is affordable within your DTI, and along with your qualifying interest rate, will then determine your total loan amount.
Okay, what if I don’t have 20% down to purchase a home?
Of course, we know especially with today’s housing prices, not everyone has saved up the usual high five figure amount that would equal a 20% down payment. Even still, your lender will look at your DTI to determine your loan figure based on the amount of cash (if any) you can put toward your home purchase. Keep in mind that while there are low money and no money down loans out there, you still have to be able to afford the monthly mortgage. The more you have to put toward the purchase price, the more home you can afford, and/or the lower monthly payment you’ll have.
I’m self-employed. Can I qualify for a home loan?
There was a time, before the recession, that it was fairly easy to get a home loan, even if you were self-employed. The “stated income” loan often used by those who were self-employed required little in the way of proof that what you actually made equaled what you put on your loan application. Guess what? Believe it or not, both buyers and lenders “occasionally” abused the system, which resulted in many buying homes they actually could not afford.
Since the recession, new rules and guidelines have been in place and are enforced for self-employed home buyers. First of all, you’ll need to show your lender at least two years’ worth of tax returns from your business that provide an accurate portrayal of your annual earnings. Also, your lender will use only your adjusted gross income as a qualifier, and not your overall gross income.
Team Avalos Real Estate is here to help you with all of your real estate needs!
As licensed, full service real estate agents, we have the experience and knowledge to help get you qualified for a home loan and get you into the home of your dreams. Contact us today for a no obligation consultation.