When we take out a loan to buy a home, it is the bank that puts up the most money and has the greatest risk. We may come up with 3.5% to 20% down payment on a normal loan but the bank has to make up the difference of 80% to 96.5%. Since they are at a greater risk, they want to increase the odds that you are going to be able to pay back the money. They use three main criteria to qualify borrowers for loans in Denver. The lenders want to know how much of a down payment that you have, how much income you make annually and during the past two months, and your credit history.
Do you have enough income to afford this loan?
There are two income calculations most lenders use. The first or Front Ratio is your housing expense-to-income ratio. This is to say your proposed mortgage payment (principle, interest, taxes and insurance) divided by your gross monthly income. The second or Back Ratio is your total monthly obligations-to-income ratio. This is your gross monthly payment including Mortgage PITI divided by your gross monthly income. The second ratio is the one that messes many people up because they may have car and credit card obligations that use up too much of their income.
Conventional and Non Conventional Ratios.
Most conventional lenders like Fannie Mae and Freddie Mac prefer a maximum of 28% for the front ratio and 36% for the back ratio. (28/36) The government backed loans like FHA allows 31/43 and VA only uses the back ratio of 41% as a guideline. Non-Conforming loans do not conform to the rigid, strict guidelines of conventional loans in Denver. These loans usually only use the back ratio and I have seen them go as high as 55%. If all of this seems confusing, that’s because it is. I suggest that you fill out the form below and schedule an appointment to go over your options with one of The Kuchar Team preferred lenders.
How Much Down Payment Do I need?
Your down payment is a very important factor in determining how much a lender is willing to lend to you. The greater amount that you put down on a loan, the lower the risk is that you will default on the loan. In the early 2000′s the lenders were using “no money down” loans to get people into homes and charging high interest rates. These are the loans that ended up in default in the late 2000′s and helped cause the credit crunch. So now FHA loans require that you put a minimum of 3.5% down payment on your Highlands Ranch real estate purchase. Other conventional loans such as Fannie Mae and Freddie Mac want at least 5% down payment. If you are a veteran, you may use your VA benefit to qualify for their no money down program. All of these loans require PMI insurance ( mortgage insurance ) when there is less than 20% down payment from the borrower. Another thing to remember about mortgage down payment guidelines is that your down payment has to be “sourced” and “seasoned”. What that means is the bank wants to verify that your down payment is coming from you and they want to see it in on a bank statement for at least three months.
What kind of credit do I need to get a loan?
Whether you agree with how the bureaus score credit or not, it is a fact of life that they cannot be avoided on conventional loans. The higher the score that you have, the better the interest rate you tend to get. From my experience, credit scores of 720 and higher qualify for the best interest rates which are prime plus 1% using the 10 year T Bill as a benchmark. The next level tier pricing seems to be between 640 and 719 which has a 1 to 2 point premium. Loans are available to people with credit scores below 640 and usually get priced 3 to 4 points higher and tend to be very tight on qualifying guidelines. There are institutional and hard money lenders in Denver that do not care about your credit but determine loan amounts and interest rates on the equity of a property and your ability to pay it back. These are usually short term loans.