Applying for a Home Loan the Right Way

It used to be that no matter who you were, what kind of job you had, or whatever your FICO score, anyone could apply for and receive a home loan.

With an economy that has yet to recover, things have changed since. But many of us still have dreams and aspirations, and so what if the economy is struggling with no real signs of recovering. Are we supposed to just sit around and save every single penny like some sort of miser? What if you don't wanna sit around for two, three, or four, or maybe even five years, waiting for that invisible economy to recover. What if you wanna house, a house of your own, a property you can call home? Are you still to sit around waiting for this?

The answer is NO! You shouldn't wait, you should be out shopping for a home.

With a down economy comes consequences, when shopping for a new home. Like only a select few can apply for a home loan. Or that you need a big down payment in order to qualify for a home loan. But like so many things in life, there are ways around these hurdles.

The 3 myths about home loans.

1. Big down payment. This is not true, in the last two years in order to receive a regular home loan, a person needed 20% down payment on a home. All that has changed now, as conventional loans can be had now with as little as 5% or 10% down payment. Unlike 20% down, a loan with 5% or 10% down comes with PMI (premium mortgage insurance), this is an extra payment on your home loan paid every month. Mortgage insurance is a way for the banks to cover their losses in case a person can no longer pay their monthly mortgage payments.

Government programs like FHA loans also exist. FHA loans are like conventional loans, the rates are competitive with regular bank loans, the difference is FHA loans can be had with as little as 3% down. FHA loans do come with PMI insurance, and at a minimum cost of 1.75% paid to the bank as a loan fee. This ends up costing close to 5%, not including escrow and title fees.

2. You have to show high income on your Tax returns. This is true when applying for a FHA loan, or a 5% and 10% down payment loan. When applying for either of these loans you must show high income taxes. Another catch is, besides the high income, you must show little to no debt, as your debt to income ratio can NOT exceed 45%. Say your applying for a loan for $100,000, and you make close to $2000 a month, with 5% down your loan comes out to be around $95,000, at 5% interest rate your monthly payments are around $400, with PMI, taxes and home hazard insurance your payments come out to around $800 a month. That means your other debts, like credit cards and car payments, combined cannot exceed $900 a month, which would push your debt to income ratio over 45%, thus disqualifying you for a home loan.

Whats an alternative to this?

20% down payment, this is the best way to go if you don't show high income on your tax returns, or have to much credit debt because a family member decided to buy a car under your name or a son or daughter is going to college and your paying his or her tuition with credit cards. Some people have side jobs that pay cash only, or they just don't wanna show high taxes. With 20% down, a person can apply for a home loan with Verification of Employment Only, or VOE. These types of loans are only available at small lenders, banks you probably have never heard of before. A big bank like Bank of America or Wells Fargo would not carry a loan like this due to the high risk of uncertainty, when it comes to clients income. These small banks that carry VOE loans cannot be applied to directly, rather you must go to a mortgage broker, a middle man, who will set everything up for you. The way VOEs work is, you apply for a home loan through a mortgage broker, if the broker asks how much you make, instead of saying $2000 you can say something like $4000. Then the bank sends a form to your current job which verifies your income with only a call. The catch is you must talk to your boss about embellishing your current income, if your boss is willing to do it then your all set.

3. Good Credit. You don't need the best credit to apply for a home loan. You also cannot have any collections or derogatory trade lines either. But Sometimes things happen and you might be late on a car loan or a credit card loan, and your credit drops from 730 to 640. One late payment, especially a recent one can do significant damage to your credit report. And creditors, sometimes, are not willing to remove late payments, no matter how good of a client you have been in the past. Thankfully now you can apply for a home loan with as little as 640 credit. The difference between a 730 credit and 640 credit, when it comes to home loans, are mortgage rates. With a good credit score you might be able to get a rate of 4.8% but with a bad credit your rate might be closer to 5.3%. Which isn't a big difference, on monthly payments, when it comes to mortgage loans of 30 years.

And those are the 3 myths about home loans. I always recommend people to go for big down payments. Avoid the unnecessary costs that come with small down payments, but if you can't afford a big down payment, it is good to know other loan programs are still available.

My final advice on buying a home is, if you wanna own a home in the future under no circumstances should you finance a car or any type of loan for a relative or a friend under your name.

Hope this helped. Cheers!