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How to Get a Mortgage and How Lenders Evaluate You

February 12th, 2018 6:38 AM by Jackie A. Graves, President

It’s easy to find your dream home and envision your life there, but harder to actually buy that home unless you know how to get a mortgage. So let’s take a look at the main things you need to know.

How Lenders Evaluate You

To qualify you, lenders look at three main factors:

1. Affordability. Lenders use a debt-to-income (DTI) ratio which tells them what percentage of your income will be going towards all of your bills. They will let you spend as much as 43 percent of your income on housing and non-housing bills.

2. Credit health. Lenders will run your credit report from all three credit bureaus — Equifax, TransUnion, and Experian — and base your loan approval on the middle of your three scores. In addition to scores, the reports lenders pull will also show them your full credit history which they also consider. If you run your own credit scores, your lender won’t use them — they must use their own, and the reports they pull will most likely produce different scores than you’re able to obtain as a consumer. See below for how to review your credit history for free.

3. Skin in the game. Lenders consider down payment and how much money you’ll have left over after you close a home purchase — they review this against the DTI to consider how fast you’ll be able to build up reserves. As noted below, lenders will still allow very little down, and some loans don’t require money left over after close. But even in situations like this, you should consider whether you want to own a home with no reserves.

Know Before You Owe

Mortgage planning is not just as simple as budgeting for a down payment. You’ll need to plan for three categories of cash-to-close when buying a home.

1. Down payment. Current or past members of the U.S. military can get a loan with zero down, and everyone else can put as little as 3 percent down on a conventional loan and as little as 3.5 percent on an FHA loan. If you want to avoid the extra monthly cost of mortgage insurance, you typically need to have a down payment of at least 20 percent.

2. One-time closing costs. These include lender and appraisal fees, title insurance and transaction settlement fees, home inspection fees to make sure the property you’re buying is acceptable to you.

3. Pre-paid costs due at closing. When you close on a home, it might be the middle of a month or a local property tax cycle. So the interest you’ll pay on your mortgage for the remainder of the closing month gets prorated and you prepay it when you close. Same with property taxes. Also lenders require you to prepay one year of homeowner’s insurance at closing. And if you’re getting a loan that requires you to save up for property taxes and insurance by paying into an account monthly, you’ll have to prepay that as well — it’s called an escrow or impound account.

The Federal government has a program called Know Before You Owe, which requires all lenders to follow a standard format for disclosing cash-to-close line items to you.

This way you can see the total cash you’ll need and nothing will be a surprise. Therefore, it’s good to connect with a lender even if you’re early in the home buying research process. They will give you these disclosures so you have a very accurate assessment of cash needed to meet your home buying goals.

Mortgage Budgeting

A homeowner’s budget isn’t just a mortgage payment. It’s also property taxes and insurance, and mortgage insurance if the down payment is less than 20 percent.

So as you plan your mortgage budget make sure to use a mortgage calculator that includes these items. And when you’re ready to talk to a lender, the disclosures noted above include a breakdown of these monthly cost line items.

Homeowners can currently deduct mortgage interest and property taxes from their gross income when filing tax returns to ultimately pay less tax and therefore lower their total cost of homeownership, but when budgeting, it’s best to budget with the pre-tax numbers because that’s what’ll be due each month — the tax benefit comes after you file each year.

If you’re buying a condo or a home within a planned development such as a gated community, find out what the homeowner’s association (HOA) dues are and include that in your budget.

Then of course as a homeowner, you are responsible for your own maintenance and upkeep on the home, so you’ll want to build that into your budget too.

Preparing For the Mortgage Process

You can save for a down payment and cash to close, or lenders also allow you to receive gift funds for a home purchase.

If you have the ability to get gift assistance, it’s worth considering because the rate of home appreciation in your area may outpace your savings rate, making it more expensive to buy the same home later rather than now.

As for making sure your credit is clean, there is only one Federal government-sanctioned free credit report service — AnnualCreditReport.com. You can use this to review your credit history to see if there are errors or derogatory items you need to clean up.

The factor that causes credit scores to fluctuate the most month over month is credit card balances. To keep your credit score the highest, try to keep your credit card balances at 30% or less of your credit limit.

Deep Dive On How To Get A Mortgage

If you want to go deeper on individual topics see Zillow’s How To Get A Mortgage library.

To view the original article click here

Posted by Jackie A. Graves, President on February 12th, 2018 6:38 AM

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