Buying a home in 2011

With interest rates hitting an all time low for the year this week and Spring upon us I figured it would be a great time to help shed some light on a topic that seems to be of much debate these days in the mortgage industry. I find myself coming across more and more people in my line of work that tell me sure mortgage interest rates are great, but that's because no one can get approved for a loan. I'm here to tell you that is just not true. While lending guidelines have undoubtedly tightened up over the last few years there are still many programs available to help you purchase and or refinance a home. I would like to share just with you some general information with on what you need to do and what lenders are looking for to get you approved for a mortgage in today's market.

The basic criteria of what lenders are looking for when they decide to approve or deny your mortgage application are what we in the business like to call the 4 C's. The 4 C's are Capacity, Credit, Cash and Collateral.

Let's look at the first C. Capacity analyzes a borrower's ability to pay their purposed debt. Capacity considers and calculates what your Debt to Income Ratios is using two calculations. The first calculation is your front end ratio. A borrower's front end ratio calculates their monthly housing related expenses divided by their pre-tax income. Just to clarify monthly housing expenses includes principal and interest, real estate taxes, home owner's insurance, monthly mortgage and flood insurance if applicable. A 28% or less front end ratio is considered a good front end ratio. Some lenders will allow this ratio to be higher than others. The second ratio is the back end ratio. The back end ratio simply takes your front end ratio and adds to it all of a borrowers recurring debts. This does not take into account expenses that aren't reported on your credit such as cable TV, cell phone, utilities etc. A good back end ratio would be 40%. Please keep in mind you need to speak with an experienced mortgage loan originator in order to help you determine exactly what income a bank will or not all you to use when performing this calculation.