December 17th, 2018 11:43 AM by Jackie A. Graves, President
FREEHomePurchaseAnalysis Today'sMortgageRates FREEHomeRefinanceAnalysis
you’re sitting on a ton of cold, hard cash, you’re going to need a mortgage to buy a home.
you can’t just show up at a bank with a checkbook and a smile and get approved
for a home loan—you need to qualify for a mortgage, which requires some careful
So, how do
you please the lending gods? It starts with arming yourself with the right
knowledge about the home loan application process.
are three things you need to know before applying for a mortgage.
all-mighty credit score. This powerful three-digit number is a key factor in
whether you get approved for a mortgage. When you apply for a loan, lenders
will check your score to assess whether you’re a low- or high-risk borrower.
The higher your score, the better you look on paper—and the better your odds of
landing a great loan. If you have a low credit score, though,
you may have difficulty getting a mortgage.
what’s considered a good credit score in the mortgage realm? While a number
of credit scores exist, the most widely used credit score is the FICO score. A
perfect score is 850. However, generally a score of 760 or higher is considered
excellent, meaning it will help you qualify for the best interest rate and loan
terms, says Richard Redmond, mortgage broker at All
California Mortgage in Larkspur and author of “Mortgages: The Insider’s Guide.”
A good credit
score is 700 to 759; a fair score is 650 to 699. If you have multiple blemishes on your credit history (e.g., late credit card
payments, unpaid medical bills), your score could fall below 650, in which case
you’ll likely get turned down for a conventional home loan—and will need to
mend your credit in order to get approved (unless you qualify for a Federal
Housing Administration loan, which requires only a 580 minimum credit score).
meeting with a mortgage lender, Beverly Harzog,
consumer finance analyst and credit card expert at U.S. News & World
Report, recommends obtaining your credit report. You’re entitled to a free copy of your full report at AnnualCreditReport.com. Though the report does
not include your score—for that, you’ll have to pay a small fee—just perusing
your report will give you a ballpark idea of how you're doing by laying out any
problems such as late or missing payments.
acceptable down payment on a house? In a recent NerdWallet study, 44% of
respondents said they believe you need to put 20% (or more) down to buy a home.
So, if you do the math, you'd have to plunk down $50,000 on a $250,000 house.
Of course, that’s a big chunk of change for many home buyers.
news? That 20% figure is common, but it's not set in stone. It’s the gold
standard because when you put 20% down, you won't have to pay private mortgage
insurance, which can add several hundred dollars a month to your
house payments. Another advantage of putting down 20% upfront is that that's
often the magic number you need to get a more favorable interest rate.
But, if you’re unable to make a 20% down payment, there are many lenders that
will allow you to put down less cash. And there are a number of loan products
that you might qualify for that require less money down. FHA loans require as
little as 3.5% down. The U.S. Department of Veterans Affairs loan program gives
active or retired military personnel the opportunity to purchase a home with a
$0 down payment and no mortgage insurance premium. Same
with USDA loans (federally backed by the U.S. Department of Agriculture Rural
option worth pursuing is qualifying for down payment assistance. There are 2,290 programs across the
country that offer financial assistance, kicking in an average of $17,766,
according to one study. (You can find programs in your area on the National
Council of State Housing Agencies website.)
some cases, though, where you’ll have to put more than 20% down to
qualify for a mortgage. A jumbo loan is a mortgage that's above the limits for
government-sponsored loans. In most parts of the country, that means loans over
$417,000; in areas where the cost of living is extremely high (e.g., Manhattan
and San Francisco), the threshold jumps to $625,000. Since larger loans require
the lender to take on more risk, jumbo loans typically require home buyers to
make a bigger down payment—up to 30% for some lenders.
approved for a mortgage, you need a solid debt-to-income ratio. This DTI figure compares your
outstanding debts (on student loans, credit cards, car loans, and more) with
if you make $6,000 a month but pay $500 to debts, you’d divide $500 by $6,000
to get a DTI ratio of 0.083, or 8.3%. However, that's your DTI ratio without a
monthly mortgage payment. If you factor in a monthly mortgage payment of, say,
$1,000 per month, your DTI ratio increases to 25%.
this number to be low, because evidence from studies of mortgage loans shows
that borrowers with a higher DTI ratio are more likely to run into trouble
making monthly payments, according to the Consumer Financial Protection Bureau.
For a conventional loan, most mortgage lenders require a borrower’s
DTI to be no more than 36% (although some lenders will accept up to 43%), says Ray
Rodriguez, regional mortgage sales manager at TD Bank.
news? If you’re above the 36% ceiling, there are ways that you can lower your
DTI. The easiest would be to apply for a smaller mortgage—meaning you’ll have
to lower your price range. Or, if you’re not willing to budge on price, you can
lower your DTI by paying off a large chunk of your debts in a lump sum.
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