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Top 7 Common Hurdles When Buying a House
There are many issues related to buying a house. Common hurdles when buying a property includes credit problems, borrower’s funds and problems related to the property itself. Not many people known that choosing a bank or loan officer also will have an impact on your loan and if you close on your property or not. Many loans fall apart because of income or not having sourced funds for a down payment and closing costs.
Losing an Offer on a Property
Let’s start from beginning of the process of buying a property. Without passing this step we will not be able to move forward. First and the most common struggle might be not properly prepared a prequalification letter. Some people confuse it with a pre-approval letter. A “pre-qual” most of the time is signed by underwriters and generated from LOS, a system for mortgage loan officers where they pull your credit (a hard pull).
The loan officer will also run a DU, a desktop underwriting system which will theoretically pre-approve you for the loan and get all conditions which need to be satisfied to be able to close on your loan. In some circumstances your offer can be denied if you make it with a pre-approval letter which is weaker than prequalification letter. Bill Gassett, a Realtor, and founder of Maximum Real Estate Exposure "says to win the battle you need to have a strong offer. To get a home under contract it's vital to deal with an experienced Realtor who will help win the bid based on market trends and the rapid escalation in prices.
The House Doesn’t Qualify
Offer can be accepted, and you might think that you will get to the closing in 2 weeks. Sometimes this doesn’t happen. Let’s say you get an FHA loan with 3,5% down insured by government. The house needs to be “livable” so The Federal Housing Administration (FHA) - which is part of HUD – can insure the loan. Livable means there are no storm damage, no cables sticking out from the outlets, no cracks in a concrete, and no roof and structural issue. Addition without permit also might be problem when applying for an FHA loan. All appliances must work, and your lender will choose a HUD-approved appraiser to check all of that.
Credit Score / High Debt
Depends on a type of mortgage loan you are applying for you might need from $0 down for VA loans to up to 10%-25% down for conventional loans or higher risk loans for investments. The most common loans are FHA with 3,5% down when your credit is at 580 or more or going conventional with 10%. Credit lower than 500 in most cases will disqualify you from getting a loan. Your debt needs to be subtracted from your monthly earnings and sometimes you credit cards or collection needs to be paid off before closing on your mortgage. In some circumstance a lender can do a rapid-rescore to get you to the finish line if your credit score is too low and you don’t qualify for a loan.
Restrictions on Eligible Income
There are a few different types of restrictions that may apply when it comes to eligible income for a mortgage. First, there is the debt-to-income (DTI) ratio limit. This is the maximum percentage of your monthly income that can go towards debt payments, including your mortgage. If you’re a first time home buyer, keep in mind that you can qualify for a down payment assistance program in your state.
For most lenders, the DTI limit is 43%. Another common restriction is the maximum loan-to-value (LTV) ratio. This is the maximum amount that you can borrow as a percentage of the value of the property. For example, if you're buying a $200,000 home and the maximum LTV ratio is 80%, you can borrow up to $160,000.
Other restrictions that may apply include minimum credit score requirements and maximum loan amount limits. Each lender has different requirements, so be sure to shop around to find the best deal.
Not Enough Money for a Down Payment
Not everyone who wants to buy a home has the money saved up for a down payment. In fact, according to a recent study, over 60% of millennials don't have enough money saved for a down payment on a house. Before applying for a loan make sure your money on your bank account is sourced (they need to be there for at least 60 days) and they total money you need to put down it’s not just 3,5% required for FHA loan. Remember that in most cases you will need to cover costs like appraisal, inspection, titles, upfront insurance, and other closings costs which are not built into the rate you will get.
Sometimes your appraisal will come lower, and you must pay the difference between appraised value and sales price at the closing. Bank will not lend more money than the house is worth to you. So, keep in mind that it’s always good idea to have some extra money put on a side to be able to close on your mortgage and get into your dream home.
Bankruptcy or Foreclosure
Many people are not able to qualify for a mortgage because of bankruptcies or foreclosure in past 2 years or 4 years. There are different waiting period for 2 common types of bankruptcies (chapter 7 and chapter 13). After bankruptcy you need to re-establish your credit and get at least 500 FICO. Sometimes you need to also write a letter of explanation, so an underwriter can understand your situation.
For foreclosure you might wait 2 up to 7 years depends on you circumstances and type of a loan you want to get. Veterans might wait just 2 years when applying for a VA loan. From the other hand for Fannie Mae/Freddie Mac backed loans people can wait even 7 years.
Not Closing on Time
After dealing with all issues above there is a last one thing I need to mention here. It’s a choosing an experienced realtor and a loan officer who will guide you and help you down the line. They have a group of people they work with on a daily basis. They will help you to find an attorney, an inspector and a CPA who will if you need it (for example: write you a letter that your monthly payments will not be affected when applying for a 12-month bank statement loan). All these people will be part of “your transaction” and at the end of a day you must decide who you’re going to be working with. Pete Beeda, a Realtor, and founder of Short Sales Certified says “I’ve seen many loans falling a part because of delays and not extending contracts on a seller’s side. This was caused mostly by poor communications and delaying on all steps in a mortgage process”.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes