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Can I Afford a Home?

By Gretchen Wegrich Updated on 12/22/2014

How much home can you afford?

Do you think you could qualify for a home loan as a first time homebuyer? Believe it or not, your chance of being denied on your first loan application attempt is approximately 33%! The good news is that there are steps you can take to increase your chance of qualifying the first time around.

3 Steps For Home Loan Qualification

  1. Get copies of your credit reports and scrutinize everything that's been reported. Reporting and identity errors, inaccuracies, outdated information and other mistakes decrease your credit score and damage your credit profile. Estimates put the number of credit reports containing mistakes at nearly 75%. Correcting all misinformation you find increases your credit score and your chances for home loan approval.
  2. Calculate how much money you have left after paying your financial obligations each month. The amount left over is called your disposable/surplus income and hopefully you have some.
  3. Learn the difference between debt and expense. Then make sure the amount it takes to service your debt doesn't exceed 10% of gross income. Debt is something you borrowed and have to pay back. It usually gets reported to the credit bureaus and includes things like student and auto loan payments and payments on credit cards. Expenses are everything else you pay for like food and utility bills.

A debt service payment that exceeds 10% of gross income is a common reason home loan applicants are denied on their first attempt at obtaining a home loan. If you need to, reduce it.

It's not enough to have the right credit profile, a job, and a two-year track record of employment. To increase your chance of home loan approval the first time you apply, you need to address the issues listed above. Even if you're not in the market for a new home, address them anyway. Doing so will increase your credit score, improve your financial situation, and prepare you for the next home-buying opportunity that's too good to pass up!

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About The Author:
Gretchen Wegrich
Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.

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