Applying for a home loan can be both exciting and excruciating. You are on the verge of buying a home, a place to call your own; of course it is exciting. However, it is important not to get too caught up in the celebratory mood; home loans, by virtue of their large amounts, are also the cause of significant concern and worry to almost everyone who applies for one, especially in the beginning stages. Learning how exactly banks and credit unions calculate your eligibility to qualify for a home loan can lead to some well-deserved peace of mind and security in the fact that you have done all you could have. Getting to know how much you can borrow in advance can also help you narrow down your choices and your budget, which will certainly help you to arrive at a decision about a house or piece of real estate sooner.
The general rule of thumb when it comes to calculating your eligibility for a home loan is that it is five times your annual take home (after tax) pay. However, pending “open” mortgages like a car or an education loan, or even credit card debt,that require monthly payments can skew that number by making lenders warier of lending to you. Also, banks and credit unions do not always agree on what is the “qualifiable” income, which can often differ from what appears on your salary slip (if you are employed by a company; the rules are different for the self-employed). Lenders will often calculate a gross “housing cost” of a borrower as 28% of the latter’s gross monthly income as well as your total debt to income ratio.
Having a high credit score and a clean and favorable credit report is also advantageous for getting a loan (of any kind). A high credit score can help you pre-qualify for a mortgage and make it easier for lenders to deem you a responsible borrower. A low credit score can result in low financing, requiring you to make a larger down payment, a high interest rate, or even outright rejection or cancellation of your application.
It is always a good idea to pay for 20% of the home up front and finance the rest of the value. People with good credit scores can often get away with a lower down payment, but putting 20% down is traditional for a reason: it is a safe bet and if you cannot afford to put 20% down, you probably cannot afford the house.
Other than these, many extraneous factors that lenders take into consideration include the presence of bankruptcies in the past, history of regular payments, any collections that may have been initiated by a past lender, any credit cards that have been maxed out, etc. Usually, a lender will sit down to discuss these factors before arriving at a final number that they can offer you as a loan. As a general rule though, good personal finance is key to qualifying for the highest loan amount you are eligible for.