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Best Way To Get a Mortgage for First-Time Home Buyers

Written by Posted On Monday, 30 April 2018 08:14

The most sophisticated loan instrument on the market today is a home mortgage loan. There is no better time to apply for your first home mortgage loan as the housing market for 2018 has a positive outlook.

The loan application of any potential borrower has to go through a plethora of underwriting criteria to determine the amount of the loan to be approved and many other terms.

As an applicant and first time home buyer, you usually stay hopeful to get the loan amount you need for your first home. However, you won't always get the loan amount for which you had applied for.

This article will provide you with the essentials of what goes into determining if you are eligible for a first home mortgage loan. We will also discuss the best way to get a mortgage for first time buyers.

First Home Mortgage Loan Eligibility

The process of determining the eligibility of an applicant to be approved for your first home mortgage loan is quite complex. The key decisions including loan amount to be granted, the rate of interest to be charged etc. depends upon the eligibility of the applicant.

The eligibility is determined based on many factors and the paperwork supplied by the applicant. A lot of complex calculations and the sophisticated system (mortgage underwriting) takes places while determining the eligibility.

The thumb rule for determining the eligibility based on income drawn by the applicant is by subtracting all financial liabilities and taking the remaining income into account to arrive at loan amount. There are many factors that add to determining the eligibility of the candidate. These factors include credit history, stability factor in terms of continuity of income, reputation and statutory approval of the project.

Below are mentioned some factors that go into determining the home loan eligibility which is followed by the tips to increase the chances of eligibility.

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checkmarkFactors determining first home mortgage loan eligibility:

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  1. Income: Income is the most crucial factor and is always taken into consideration when you apply for a first home mortgage loan. Higher the income, better are the chances of getting approved for the loan and also the likeliness of getting a loan amount you wanted.
  2. Applicant’s age: Applicant’s age is generally taken into consideration to determine the loan term. The younger you are, better are your chances of getting your application approved and that too with a loan amount or money amount of your choice.
  3. Credit History: Another important factor that is considered is your previous and current credit relationships with the bank and other financial institutions. In case you have been late on paying for your credit card or have a default personal loan, your chances of being granted a loan will be negatively affected. If you had a loan in the past which you paid off successfully, it adds value to your application and increases your chances of being granted a loan. Therefore, it is important to stay up to date with dues payments, loans, and cards.
  4. Source of Income: Your source of income is yet another important determinant of your first home mortgage loan eligibility. If you are working with a reputed company and are salaried, the process becomes easier. Employees of PSUs and Government organizations get preference since they fall under state jobs. Professionals like Architects and Doctors enjoy an upper hand. Those who are self-employed are required to provide multiple documents including bank statements and ITR etc. to support their income.
  5. Relationship with Bank: If you own a financial account with the bank you are seeking a loan from then it works in your favor. Furthermore, timely repayment of the loan amount from the same bank adds value to your loan eligibility since the bank has a trustworthy relationship with you.

So these are the factors that are considered while determining the loan eligibility.

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Now, let’s have a look at how you can increase your home loan eligibility:

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  1. Declare all sources of Income: If you have more than one source of income such as rentals etc., let the banker know about all of them so that they are taken into consideration. You can also discuss future bonuses that you are likely to receive (if any). This will also add value to your loan application.
  2. Pay off your existing loans: In case you have any other loan such as personal, Auto etc. or student loans, and your financial capacity allows you to pay them off, then doing so will positively impact your credit.
  3. Add parents/spouse as co-applicant: One of the most preferred routes taken by applicants that add value to the loan application is showing your family members as co-applicants. Doing so provides an extra layer of security to the banks and your chances of increasing the monetary eligibility doubles.
  4. Choose a longer tenure: It is true that the interest charges will be higher but choosing a longer term can assist you in getting a loan amount of your choice. In fact, you can also choose to opt for a bigger amount of loan if you are not happy with the currently approved loan amount.
  5. Choose reputed projects: If you are looking forward to buying a plot or a flat on loan, make sure they are being offered to you by a reputed organization. Projects offered by a lesser known organization/builder etc may fail to add the required credibility in your application.

How do banks calculate your home loan eligibility?

From a lender's perspective, loan eligibility is based on a formula. The most common rule of thumb is that your monthly mortgage payment should not exceed 28% of your gross income. This calculation includes more than just the base price of the house. Consider, for example, a $50,000 gross income. Based on 28% of that amount, the mortgage payment would be $14,000 per year or $1,166.66 per month. Let's review, that $1,166.66 needs to cover all four potential components of a mortgage: principal, interest, taxes and insurance, often referred to as PITI.

If your credit history is good or excellent, the mortgage lender may let you take out a mortgage with a monthly payment equal to 30% or even 40% of your gross monthly income. In our example, 40% would get you a yearly mortgage payment of $20,000 or $1,666.66 per month. The $500 per month difference would let you afford a more expensive home, but you should take a close look at your finances before making such a decision.

We would recommend reviewing your credit report. You can get your credit report for free by using AnnualCreditReport.com or Credit Sesame. If there are any discrepancies in the report, dispute them. This could improve your score and, in turn, improve the terms of your first home mortgage loan.

This post was originally seen on My Millennial Guide.

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