Qualification factors to think about for the buyer or the seller

Here is just a quick way to see what people qualify for. There are definitely more factors than the three factors that I am going to explain, but these three are the base structure for qualifying prospects. The three factors are: Loan to value, debt to income, and credit.

With these thoughts in mind I hope to better prepare the buyer and seller in future real estate endeavors. One thing though, buyers or sellers consider that you can simplify the process by working with a financial institute in the beginning to help people know what kind of loan they qualify for form the start. It usually will just cost the buyer or seller the cost of the credit report, which is somewhere around twenty dollars. Well, happy house hunting!

The first factor is the loan to value. 
This means, the amount of the loan divided by the value of the house. For example, the house is worth $100,000 and the loan used to purchase the house is $80,000 then the LTV( loan to value) is 80%. The higher the LTV the harder it is to qualify at a lower rate or even qualify for a loan. You can get purchase loans up to 105%( the extra 5% is to include closing costs in some situations.) The ideal LTV would be up to 75% , this range is where the lower rates will be. 80% and up the rates start to climb, so be prepared by looking for a situation that will put you or your buyer in the LTV range that is desired. To solve the LTV problem people can get gifts from relatives, save the money up themselves, or negotiate with the owner to get what is called an owner carryback.( owner carry back is where the owner has a contract for the last percentage of the value of the house that the lending institute does not loan on. These contracts are usually set up through an escrow service for legal purposes.) Credit also plays a role in what LTV a person qualifies for, the better the credit, the greater the LTV.

The next would be debt to income ratio. 
This is figured out by taking the gross monthly consumer debt(ex: credit cards, auto loans, personal loans, lines of credit, etc.) and dividing it by the gross monthly income( make sure to include all monthly income that you claim on taxes, ex. rental income, overtime, dividends, etc.) Example: $450 monthly consumer expense divided by $3000 in monthly income equals 15%. The desirable ratio would be anywhere between 5% and 15%. The reason for that is because you have to remember that monthly housing expenses desired by lenders will be 35% and less. Monthly housing expenses include the principle, interest, taxes, and insurance.

The last factor is credit.
Now if you add the monthly housing expense and the monthly consumer debt you will come up with the total debt to income ratio. Desired total DI(debt to income) ratios should not exceed 42%. Some lenders can work with higher DI’s but, the rate and LTV will suffer. Housing DI’s should be between 28% and 32% while consumer DI’s should be the compensating factor up to 42%. Like I said, these are just desired ratios, they are not set in stone. Different lenders have different guidelines to fit consumer needs.

How do you figure out the monthly housing expense? Well that all depends on the three factors put together. Although, it is tough to get a credit report, and even tougher to figure out how they come up with their equation, the main factors considered in one is the payment history (# of 30,60, and 90 day lates), the ratio of balance compared to the limit, the length of time the account has been established, and how long the accounts have been in good standing. So if you are the buyer you can figure out about where you stand in credit.

So, the way I will give you an idea of monthly housing expenses is by telling you to take the monthly cost of the real estate taxes (roughly $85 average), the monthly cost of home insurance (roughly $26 average), and adding it to the principal and interest of the loan. Here is a basic chart of principal and interest for a 30 year amortization of a loan. Use it to figure out the monthly housing expenses and total DI. Good luck and don’t worry about me collecting your homework.