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So You Think You Can’t Qualify For a Home Loan?

New report shows that what potential home buyers don’t know about mortgages unwittingly keep them on the sidelines.

So you’re sitting on the fence, still renting because you think you can’t qualify for a loan. Your credit score isn’t high enough, and you have a few bills to pay every month. Also, who has enough cash on hand to make a 20 percent down payment?

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A recent survey from OmniTel showed that 55 percent of potential home buyers do not believe they are capable of qualifying for a home loan. Out of that number, 74 percent have never even attempted to find out if they can qualify for a mortgage, or what it takes to get one. So let’s tackle some of these sidelining factors, and see if we can’t enlighten the non-believers.

My Credit Score Is Too Low To Qualify For a Loan

A FICO (Which stands for Fair, Isaac and Company) score tops out at 850, and tt’s true that to qualify for certain lines of credit, having a score of 720 or higher. However, it turns out that 33 percent of home buyers nationwide had FICO scores at or below 700, and FHA borrowers on average had a score of 684. So yes, there may be a home loan program out there for you if your credit is less than perfect.

I Have Too Much Debt

Aside from your credit score, mortgage lenders use two ratios to determine your loan amount. One is the front end ratio, where your gross maximum income is multiplied by a maximum percentage rate that will give you room to make your mortgage payment and take care of your monthly financial obligations. Many lenders like to use 28% as a front end debt-to-income ratio. So you would multiply your gross monthly income by .28 to determine your maximum monthly mortgage payment. However, some lenders will go as high as 36%, giving you more purchasing power.

The second ratio is called the “back end debt-to-income ratio.” This is determined by DIVIDING your monthly debt obligations by your gross monthly income. Most conventional lenders like to see back end ratios at no more than 36%, but VA and FHA requirements can go as high as 42%.

I Can’t Afford a Down Payment

We know it’s not that easy to save enough money to put 20% down on a home purchase, and finance the rest through a conventional mortgage. Think about it: A $250,000 home would require a $50,000 down payment.

The good news is that there are loan programs that require as little as 3.5% down. You may qualify for a zero down payment loan as well, but understand that most zero down options require Private Mortgage Insurance, which will be added to your mortgage payment.

The California Housing Fund offers qualified recipients up to 5% of the value of your home loan in the form of a grant to cover your down payment or closing costs. A grant is not a loan, and you do not have to pay it back.

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