Part of the American dream is to own your own home. However in recent years it has become increasingly difficult to qualify for a mortgage. Bank are no longer in good shape. The housing crisis hurt the American people bad, but it hurt banks worst. When people stopped paying for their mortgages many banks went out of business. Others saw huge losses. To prevent further losses, the banks had to tighten their restrictions on who could and couldn’t get a home loan.
There was a period in the mid 2000’s where they were handing out loans to anyone and everyone. It didn’t matter much what you made or what your credit score was. They were ready and willing to loan you money knowing full well they’d end up with your house if you couldn’t pay. That’s when the housing crisis hit and the banks ended up with a ton of foreclosed properties that were now valued at much less than when they first loaned out the money.
Contrary to what you might think, the banks haven’t invented new rules for qualifying for a mortgage. They are now using the same rules they used to use (what they should have been doing all along). Here are the general rules on how to qualify for a mortgage.
You should be able to put 20% down on your new home. This is extremely difficult especially in high priced areas such as San Fransisco where homes routinely go over half a million dollars. A 20% down payment on that loan amount is a whopping $100,000.
You’ll need good credit to qualify for a home loan. The definition of a good credit score is ever changing, but anything around 700 should be good enough. If your score is under 700 get your free credit report at annualcreditreport.com and see if there are any errors that need to be corrected. If there are, that could boost your score up to 700+.
The banks will not give you a loan if you can’t prove you can afford it. You will need to provide copies of your w2 statement, your tax returns and your check stubs. Your mortgage payment should be less than 1/3rd of your monthly income. So if you make $3,000 per month your mortgage payment should not exceed $1,000 per month.
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