August 9th, 2018 8:10 PM by Jackie A. Graves, President
Maybe you’ve heard some horror stories about homebuying: rising
prices, housing shortages and tightened lending requirements. But searching for
your dream home doesn’t have to be nightmarish when armed with knowledge to
face today’s market.
potential buyers’ most common questions. But first, some good and bad news:
Yes, creeping home prices put April’s median price of an existing home at about
$260,000, 5.5% higher than the same time last year. And yes, while lending
requirements were tighter earlier this year, there are signs that’s changing.
The upside of rising home prices and a general housing shortage is that more
people are sitting it out, which means lenders need a way to bring business
back. In June, mortgage credit availability increased, with just one catch — it
was offset by a decline in credit for government loans.
you’re shopping for a government-backed mortgage or a conventional one, our
experts tell you what you need to know.
the best interest rates goes to those with good credit. You may qualify for a Federal Housing
Administration loan with a credit score of 580 but conventional
loans typically require a score of at least 620. You may qualify for an FHA
loan with a score as low as 500, but your down payment will be higher, 10%
Other types of
loans have different requirements. A Veterans Affairs loan technically
has no minimum credit score — instead it requires that lenders look at a
potential borrower’s entire profile. U.S. Department of
Agriculture loans, primarily designed for those in rural areas,
typically require a credit score of at least 640.
Yes. If your
spouse submits their name as a co-applicant, the lender will consider their
credit score and credit history, according to Todd Hatfield, loan department
manager at Granite Credit Union. “Credit approval is based on the lowest two
middle scores of both borrowers. We take the lowest middle score from all three
reporting agencies, and use that as a baseline,” he said.
credit report with each of the bureaus before you apply for a home loan will
give you time to fix any errors or take care of any items that could be
affecting your credit score.
not-so-short answer: It depends. Traditionally, a borrower is expected to bring
about 20% to the table. However, according to Freddie Mac, it’s not a
hard-and-fast rule. In fact, buyers may be able to get away with down payments
as low as 3% through special programs. One benefit of providing at least 20% at
closing is the absence of private
mortgage insurance (PMI).
put down less may have an additional fee added to their monthly mortgage payment
to cover the PMI until they’ve built 20% equity in their home. Learn
more about ways to avoid PMI.
process can be a bit long and tedious. After filling out an application with
the lender, you’ll have to provide a lot of information, including:
Pay stubs (last 30 days)
Two years of W-2s
Two years of tax returns
Bank statements from the last
Proof of where you got money
for a down payment, such as bank statements or a statement from someone saying
it was a gift
Proof of identity
Social Security number
Once you provide the necessary documents, the lender will review
your information and pull your credit report and score. If you meet their
requirements — usually a minimum credit score, cash for a down payment and low
debt-to-income ratio — you may be approved. There are a number of things that
can derail your home purchase (even after a preapproval), so don’t open any new
lines of credit or spend a ton of money until after your loan is finalized.
Aim for 43%
or lower. Fannie Mae will insure loans for borrowers with a DTI ratio as high
as 50%, but in general, lenders prefer to see lower levels, which indicate the
ease with which you can repay the house loan. Freddie Mac recommends a mortgage
payment that’s less than 28% of your monthly income. There are some indications
that lenders weigh
DTI more heavily than credit score.
prequalification might be some of the first terms you hear in any house hunt —
many real estate agents will be reluctant to show you any properties without a
preapproval letter. A preapproval letter is typically good for 60 to 90 days.
You’ll want to apply for a preapproval once you are serious about your home
search, as you may have to reapply if you don’t find a home within the
designated time frame.
What’s the difference
between preapproval and prequalification? A prequalification requires less
paperwork and verbal confirmation of credit scores. A prequalification does not
mean you will be preapproved, it just means you are likely to qualify. A
preapproval requires more documentation, including tax returns and bank
statements. The lender pulls your credit report and offers a conditional loan. This number should
help narrow your search to homes you can afford. If you are preapproved for a
loan, you still have to wait for the bank to offer a commitment. This step
entails a home appraisal, and the bank may ask for more information from you or
the seller if they feel it’s necessary.
One of the
biggest mistakes you can make while in the process of purchasing a home is
opening a new line of credit. “The biggest detriment to buying is to get new
credit. You get people that are excited and run down to buy new furniture or a
new car,” Hatfield said. “That has to be factored into their debt ratio. If it
puts them over, they can lose out on the home.”
submitted your paperwork for preapproval, stop spending money on any of your
credit cards. Don’t make any large purchases until after you have the keys to
the home. Even if the expense doesn’t push you over the debt range, it could
delay the approval process, which could cost you your dream home, especially in
a competitive market.
misconception is that individuals who are self-employed cannot get a home loan
or that it’s more difficult. But, this isn’t true, Hatfield said. “Being
self-employed doesn’t create problems. It just changes the documentation
He did note
that one common issue is when self-employed buyers write off expenses to reduce
their taxes. “If you write it off, it’s not income and it can affect your
ability to qualify.”
Tip: Plan ahead. Consider cutting back on your write-offs or saving more money
for the down payment to offset the lower income number.
There is no
one right answer for this. The type of mortgage loan that works for you may not
work for your neighbor. And the type of loan that works for your co-worker may
not work for you.There are several loan types available but here are a few
terms to keep in mind:
Adjustable versus fixed-rate
Conforming, or jumbo, loans
difference is that a conventional mortgage is a loan from a private
institution. The loan is not insured
by the government. A government-insured loan (like the FHA, VA, USDA loans we
mentioned earlier) also originates from a private lender, but the government
insures the loan so that the lender doesn’t lose money if the borrower
defaults. While an FHA loan does require a two-step approval process (the
lender and the government), it’s actually easier to qualify for than a
conventional loan. Because a conventional loan isn’t insured by the government,
lenders often have stricter requirements.
rate means your interest rate and your monthly payment may vary. The payoff is
that you can take advantage of lower interest rates. The risk: Your mortgage
payment won’t be the same every single month. A fixed rate loan means the
interest rate (and your payment) stay the same for the life of your loan.
loan simply means that the loan meets standards set by Fannie Mae and Freddie
Mac, including loan limits. A nonconforming loan is one that exceeds those
limits, which is why it’s often referred to as a “jumbo” mortgage. Most lenders
opt for a conforming loan as it’s easier to insure and/or sell.
the most difficult part for buyers is stepping back and looking at the house
with a clear perspective. “Buying a home is an investment. You need to treat it
that way. Don’t rely on emotions. When you purchase a home it’s for a long
time, it’s not that easy to get out of a home after your purchase. If a home
needs major repairs, for example, you should consider if those problems are
things you can or want to invest in fixing.”
Buying a home
is an exciting time, but applying for and choosing the right loan can be
overwhelming. Reviewing these frequently asked questions will help clarify the
loan process so you can spend more time enjoying your house hunt and less time
stressing about the paperwork.
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