Trade Professionals Real Estate & Home Loan Planning

by Rob Delavan
October 28, 2020
Business, Construction, Real Estate
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What goals should I be setting to purchase a home in 2020/2021?

As stated in the prior blog post https://delavan-realty.com/dont-miss-this-opportunity/ over the last half of the 2010’s, rates have hovered between 3.5% and 5.5% depending on market fluctuations. Whenever the rate approached the lower end of the spectrum, refinances would increase as folks wanted to take advantage of historically low rates. Since the pandemic, rates have gone much lower into the mid to upper 2’s. As the slow recovery from the pandemic progresses, we can anticipate rates going back to a “normal” 3 to 5% range. We don’t know how long this will take but highly recommend starting the planning, purchase, or refinance process now.

If you’re in the planning stage it’s important to understand the important points listed below:

When it comes to getting a lender’s approval to buy or refinance a home, there are 3 Key Numbers that affect your ability to qualify for a mortgage and how much it will cost you —

Your CREDIT SCORE – DEBT-TO-INCOME RATIO – LOAN-TO-VALUE

Credit score

You’re probably already familiar with this one. A credit score is a three-digit number, typically between 300-850, that measures a person’s borrowing history. There are three main credit bureaus (Equifax, Experian, and TransUnion) that each determine your credit score based on your payment history, how much debt you have, your credit limit usage, among other factors.

With your permission, lenders request your credit score from one or all of the credit bureaus through a ”soft” or “hard” credit check. A “soft” check is done earlier in the mortgage process, usually during a basic pre-approval. It doesn’t affect your credit score in any way.

A “hard” check is done when you’re ready to submit an application. It signifies to credit bureaus that you’re interested in opening a new line of credit, so it will have a small impact on your credit score (usually less than five points).

Why your credit score matters for your mortgage

Your credit score helps mortgage lenders evaluate how likely you are to pay back your loan. Most lenders have minimum credit score requirements to be approved for specific home loans. And, the higher your credit score, the better the interest rates your lender can offer.

Debt-to-Income-Ratio

It’s important to establish the relationship with your mortgage loan group and real estate agent early in your planning stage. It will allow you realistically budget for important purchases, paying off of unneeded debt, creating an effective savings plan, and home purchase pre-purchase tagretting.

A good example:

Ideally tradespeople making 60k or more a year is probably a good bar to set. Your typical consumer debt load should be about $133-$155 in credit card payments monthly, and one or two car payments. That;s still enough for the payment on a $400k house with 5% down (roughly $2,150/mo including tax and ins).

Loan-to-value ratio

Your loan-to-value ratio (LTV) is a way to measure how much equity you have in your home. The LTV is the percent you still need to put toward the principal to fully own your home. The higher your LTV, the more you’re borrowing from your lender.

If you are buying a home, it’s easy to calculate your LTV. First, subtract your down payment amount from the value of the house. Then, divide that number by the value of the house.

– For example, if your property is valued at $200,000 and your down payment is $20,000, then your LTV would be 90%.

200,000 – 20,000 = 180,000

180,000 / 200,000 = 0.9 or 90%

– Another way to get your LTV is to subtract your down payment percent from 100%. So, if you’re making a 20% down payment, your initial LTV would be 80%.