December 9th, 2018 7:43 AM by Jackie A. Graves
Today'sMortgageRates FREEHomeRefinanceAnalysis FREEHomePurchaseAnalysis
complete guide will tell you everything you need to know about getting a home
you're ready to take the leap and become a home owner. For most of us, homes
come with mortgages. These large loans take decades to pay off and cost
thousands of dollars in interest, but they make it possible to purchase a house
you'd otherwise be unable to afford.
not everyone who wants to buy a home can qualify for a mortgage. That's because
lenders try to make certain you'll pay back your debt before they allow you to
borrow. Depending on the lender and the type of loan, you'll likely need to
provide a lot of documentation to prove you're qualified for a home loan.
in advance what to expect when applying for a mortgage is important so you can
start readying your finances for home ownership long before you hit up open
houses or talk with a realtor. You can also start getting documents together
for potential lenders to examine and determine whether they'll approve you for
you're not exactly sure where to start, this guide explains everything you need
to qualify for a mortgage. Read on to find out the must-haves for getting
financing for a new abode.
loan types have different rules
qualification requirements depend on which type of loan you receive, so you'll
first need to understand different categories of mortgage loans. Home loans can
be broadly divided into two different categories: conventional loans and
loans are issued by private lenders without any government guarantees.
Some, but not all, conventional loans are resold to government-sponsored
mortgages are issued by private lenders but are guaranteed or insured by
the government. If you don't repay the loan in full, the government makes the
of these categories can also be broken down into various individual loans.
few different government agencies insure or guarantee mortgages to help
would-be homeowners get approved for loans. Some agencies cater to specific
populations. Government-backed mortgages include:
loans: The federal Department of Housing and Urban Development (HUD)
manages a mortgage insurance program operated by the Federal Housing
Administration. FHA loans are some of the easiest mortgages to qualify for,
especially as the down payment requirements are as low as 3.5%. But borrowers
must pay for mortgage insurance both up front and over time, making it
potentially more expensive than the private
mortgage insurance that comes with low-down-payment conventional loans.
Mortgage insurance, which protects the lender by ensuring full recovery of lost
funds in case you default, costs 1.75% of the loan amount up front and 0.80% to
0.85% of the borrowed amount per year. FHA loans are especially popular with
first-time borrowers, but anyone can get an FHA loan.
loans: The federal Department of Veterans Affairs (VA) guarantees loans for
current and former members of the military and their families. VA loans provide
very favorable terms to eligible borrowers and have limited qualifying
requirements. You can get a VA loan with no down payment so long as the home
isn't worth more than you pay for it, and there's no minimum credit score to
qualify. You also don't have to pay for mortgage insurance, although you do
have to pay an up-front funding fee of of between .5% and 3.3% of the loan
amount unless you fall within an exception for disabled vets or military widows
loans: The Rural Housing Service (RHS) operates under the federal
Department of Agriculture to guarantee loans for rural home-buyers with limited
income who can't obtain conventional financing. The upside is that USDA loans
require no down payment. The downside is that they charge a steep up-front fee
of 1% of the loan amount (which can be paid off over the entire loan term) and
an annual fee of 0.35%.
get an FHA, VA, or USDA loan, you apply through private lenders who participate
in the government programs. You don't get a loan directly through the
government. You can expect relaxed requirements to qualify, but there are still
certain hurdles you'll need to clear. For example, the home will need to be
inspected to ensure it's in good condition and appraised to ensure that it's
worth the amount you're borrowing. If a home does not meet minimum standards
for health and safety, repairs may be required before a loan will be granted.
loans can also be broken down into different categories, including the
loans are loans that adhere to a specific set of guidelines set by Fannie
Mae and Freddie Mac. Fannie Mae and Freddie Mac are government-sponsored
entities (GSEs) that buy mortgages from the original lenders that issued them.
Many mortgage lenders don't want to keep loans they've issued for many years.
Instead, they resell the loan to Fannie Mae, Freddie Mac, or some other entity
that buys mortgage debt. Fannie and Freddie (and many other mortgage buyers)
won't buy non-conforming loans that don't adhere to established standards. For
example, borrowers typically need credit scores of at least 640, and their
total debt, including mortgage payments, can't exceed about 43% of income.
loans are loans issued by private lenders that don't adhere to guidelines
set by Fannie Mae and Freddie Mac. The most common type of non-conforming loan
is a jumbo
loan, which is a loan that's bigger than what Fannie and Freddie would buy.
For example, in 2018, Fannie and Freddie would not buy loans totaling more than
$453,100 (or $679,650 for loans issued in Alaska, Guam, Hawaii, or the U.S.
Virgin Islands). Loans are also considered non-conforming if they don't meet
eligibility requirements set by
Fannie or Freddie.
vs. non-qualified loans
you apply for loans, they'll fall into two broad categories: qualified and
non-qualified loans. Conventional and non-conforming loans could both be either
qualified or non-qualified, depending on whether the lender meets the
requirements for a qualified loan.
loans are loans that meet requirements established by the Consumer
Financial Protection Bureau to ensure lenders do their due diligence to
determine whether a borrower is qualified. Qualified loans also can't have
risky features. For example, a lender can't give you a loan with payments so
low that they only cover interest, as paying interest only never reduces the
amount you owe, and the loan is never repaid.
• Non-qualified loans don't meet CFPB
guidelines. That doesn't necessarily mean they're bad, but it does mean
borrowers should do more research to make sure these loans don't have unfair
terms. Non-qualified loans may have more relaxed requirements to get approved
than qualified loans.
to qualify for a mortgage
of the basics you'll need in order to be approved for any type of home loan
• A reliable source of income
• A debt-to-income ratio that falls
within permissible guidelines
• A fair or good credit score
• A down payment
take a look at some of these key requirements, the specifics of which vary
based on loan type.
source of income
of lenders' biggest concerns is your cash flow. Lenders want to know you have
money to pay back your loan, which means you need a steady source of verifiable
income. This can come from:
• A salary from work
• Bonuses and commissions
• Self-employment income
• Alimony or child support
• Social Security income
• Qualifying investment income,
including income from interest and dividends
• Income from rental properties
most cases, lenders will only allow you to count income if you have documented
proof that you've received the money for at least two years. If you get a
one-time bonus, there's no guarantee you'll get this money again, so lenders
don't consider it when determining whether you can borrow and how much you can
proof of income and employment
the mortgage crisis in 2008, some lenders allowed "stated income"
loans. That meant would-be borrowers told the lender their income, and lenders
didn't do much, if anything, to verify it. Unfortunately, stated income loans
were often called "liar's loans," because many buyers were dishonest
about their earnings -- often at the urging of unscrupulous mortgage brokers.
days, most lenders -- with limited exceptions, such as hard-money lenders --
require documented proof that you've earned the income you claim. This could
• Tax returns
• W2s or 1099 forms from employers or
companies that pay your business
• Pay stubs
• Bank statements
also a chance your lender will contact your employer to verify that you still
have a job. If a source of income can't be verified, the mortgage provider
won't count it as part of the income used to determine if you qualify for the
income is only one part of a lender's equation. That's because your
debt also affects the likelihood you'll be able to repay a loan. If you're
trying to borrow with a $50,000 income and $0 in debt, then you may be a better
candidate than someone with a $100,000 income and $1 million in debt.
ratio is too high, lenders may not approve you for a loan because they fear
your income is spread too thin and so you'll struggle to meet your obligations.
This is a big problem for a lot of would-be home buyers with student loans.
calculate your debt-to-income ratio
calculate your debt-to-income ratio (DTI), add up all your monthly debt
obligations and divide this number by your gross income (your pre-tax income).
your monthly debt payments add up to $2,500 and your gross monthly income is
$5,000, then you have a 50% debt-to-income ratio because 50% of your monthly
pay goes to creditors. The higher your debt-to-income ratio, the greater the
risk of lending to you.
front-end vs. the back-end DTI ratio
lenders calculate not only one debt-to-income ratio, but two: a front-end ratio
and a back-end ratio.
front-end ratio equals the total cost of your home-related expenditures
divided by your monthly gross income. Home-related expenditures that go into
this calculation include the monthly mortgage payment you'd make if approved
for the loan, property taxes, and insurance payments. Collectively, the
payments that count toward determining the front-end ratio are called PITI,
which stands for principal, interest, taxes, and insurance for your property
back-end ratio equals the total cost of everything you owe on a monthly
basis divided by your monthly gross income. It includes your student loan debt,
your auto loan, credit card debt, and any other obligations. Because more
monthly payments are considered in this ratio than in the front-end ratio,
you'll likely have a higher ratio using this calculation.
say you have a gross monthly income of $4,000; a total mortgage payment of
$1,000 monthly, including principal and interest; property taxes that average
out to $300 monthly; and insurance costs that average out to $100 each month.
Your front-end ratio would be ($1,000 + $300 + $100) / $4,000 = 35%.
lets say you also have $300 in monthly student loan payments, a $100 monthly
credit card bill, and $200 in car payments. Your back-end ratio would equal
($300 + $100 + $200) + ($1,000 + $300 + $100) / $4,000 = 50%.
debt-to-income ratio do you need to qualify?
to the Consumer
Financial Protection Bureau, your back-end ratio should not exceed 43% for
qualified conventional mortgages. Smaller creditors -- those that made fewer
than 500 mortgage loans in the past year and have less than $2 billion in
assets -- can allow you to obtain a qualified mortgage with a higher
lenders can allow you to exceed this DTI ratio, but the mortgage will then be
considered non-qualified, which means the lender won't meet the CFPB standards
aimed at ensuring that lenders avoid high-risk loans. Some lenders allow you to
obtain a conventional loan with a back-end DTI of up to 50%, while others have
front-end ratio of 28% or less and a back-end ratio of 36% or less is
considered ideal and is the standard most lenders use to determine who will get
the most competitive mortgage rates.
and Freddie Mac requirements:
May of 2017, Fannie Mae and Freddie Mac raised their maximum debt-to-income
ratio to 50%.
FHA generally requires a front-end ratio of 31% or less and a back-end ratio of
43% or less. However, borrowers with mitigating factors, such as good credit
and documented cash reserves, could have a DTI as high as 50%.
loans typically require a 41% back-end ratio.
loans require a 29% front-end ratio and a 41% back end ratio.
A fair or
good credit score
score is determined based on your borrowing history. It takes into account:
past history of making payments on time. If you've been 30, 60, or 90 days
late, this hurts your score. Judgments against you for unpaid bills or
charge-offs (where creditors give up on collecting) also damage your score, as
do foreclosures and bankruptcies. Even a single late payment can reduce your
amount of available credit you've used. If you have $10,000 in available
credit and owe $2,000, then your credit
utilization ratio is 20%. If you have $10,000 in available credit and owe
$5,000, you have a 50% utilization ratio. It's best to keep your utilization
ratio below 30% -- and the lower, the better.
mix of different types of credit you have: Having multiple types of loans
-- such as credit cards, student loans, auto loans, and/or a previous mortgage
-- can help your score.
age of your credit history: The longer your history of borrowing money, the
higher your score will be -- so long as that history is positive.
• The number of inquiries on your
credit report: Each time you apply for credit, you get a hard
inquiry on your report. These inquiries stay for two years. Too many
inquiries in too short a period of time lowers your credit score.
considered a good credit score?
are different kinds of credit scores, because there are different agencies that
calculate them. FICO
scores are popular and well-known, but some lenders use VantageScores.
scores range from 300 to 850. Here's how the score range breaks down in terms
of what's considered a good score or a bad score.
579: If you're in this range, you're considered to have poor credit, and it
will be difficult or impossible to get a mortgage loan.
This is considered fair credit. You'll likely be able to qualify for some types
of mortgages, but the terms won't be great. Government-backed loans may be
easier for you to obtain than conventional loans.
This is considered good credit. You should have a variety of lenders to choose
from, and the rates and terms they'll offer will be reasonable.
This is considered very good credit. You'll get favorable rates and terms from
This is considered to be exceptional credit. You'll likely find it easy to
qualify for a mortgage with the lowest rates and best terms from any lender.
previously used a scale that went from 501 to 990, but with VantageScore 3.0 it
changed to a range of 300-850 to be more in line with other models.
it's confusing that you have multiple credit scores, there's a simple reason
Experian, and TransUnion -- the three major credit bureaus -- developed an
algorithm for VantageScore in 2006 to compete against FICO. VantageScore is
used by millions of lenders, and it takes less time for consumers to develop a
VantageScore than a FICO score, as FICO's model requires around six months of
credit history, while VantageScores are created after just a month or two of
reports on borrowing behavior.
you can't really choose which score a lender uses. Mortgage lenders decide for themselves
whether to pull your VantageScore or FICO score.
score do you need to qualify?
both conventional loans (including those meeting Fannie and Freddie
requirements) and most government-backed loans, the minimum credit score
required is generally 620. USDA loans typically require a minimum score of 640,
however, and some lenders will provide loans to borrowers with scores of 580 or
FHA loans, it's possible to qualify with a credit score of 500 to 579 with a
10% down payment. The VA also doesn't mandate that borrowers have any
particular score, but it requires lenders to evaluate a would-be borrower's
entire financial profile. And even the USDA will allow borrowers with lower
scores to qualify with manual underwriting, which is a more thorough review of
payment is one of the last key requirements necessary to qualify for a
mortgage. A down payment is money you pay up front and out of pocket for the
a down payment ensures you have equity, i.e., an ownership stake in the house.
With no down payment or a very low down payment, you're at risk of owing more
money on the home than you could obtain by selling it. This could create a
financial crisis if you need to move, because you wouldn't be able to repay
what you owe.
typically want proof of where your down payment comes from. Acceptable sources
of funds include:
• Checking or savings accounts
• 401(k)s or IRAs
• Investments including stocks or bonds
• Trust accounts
• Cash value life insurance
• Gifts, so long as the money isn't a
disguised loan from friends or family
don't allow you to use a personal loan for a down payment on a home. However,
you might be able to get a piggyback loan if you have good credit. This
involves taking out two separate mortgages, one of which is valued at 80% of
the home's cost. The other is used to pay some or all of your "down
you take a piggyback loan, it could be structured as an 80-10-10 loan, which
would mean you borrow 80% of the home price on a first mortgage, take a second
mortgage for 10% of the home's cost, and put down 10%.
you could take an 80-20 loan, where you borrow 80% of the cost of the home in a
first mortgage and 20% in a second mortgage. Eighty-twenty loans were much more
common before the financial crisis and are now hard to find. Lenders don't like
these loans anymore -- and borrowers shouldn't either -- because if you owe
100% of the value of your home, you could end up owing more than it's worth if
there's even a small downturn in the market. If you can't sell your home for
enough to pay off both loans, you can't move to pursue other opportunities --
or move if the home becomes unaffordable due to a loss of income -- so the risk
of foreclosure is much greater.
How big of a
down payment do you need?
down payment you'll need to produce varies based on the loan. Most
government-backed loans have low down payment requirements, and some may not
even require a down payment at all.
conventional loans, most lenders want you to have a 20% down payment. If you
bought a $300,000 home, you'd need a down payment of $60,000.
some cases, it's possible to put down a smaller down payment. In fact, Fannie
Mae and Freddie Mac's guidelines
allow private lenders to make loans to qualified borrowers who have a down
payment as low as 3%.
you put down less than 20%, however, you'll typically need to pay private
mortgage insurance (PMI). You'll have to pay PMI until you owe only 80% of what
the home is worth. If you want to ditch your PMI at this point, you'll need to ask
your lender to remove it. If you don't make this request, your lender will
automatically drop the PMI once you've paid the loan down to 78% of the home's
value at the time you took the loan
protects the lender's investment if you get foreclosed on. You don't benefit
from PMI, but you pay the premiums, which cost around 0.3% to 1.5% of the loan
value annually. If you took a $280,000 loan on your $300,000 house and the PMI
rates were 1.5%, PMI would cost you $4,200 per year (1.5% x $280,000), or $350
a credit score of 580 or higher, the minimum down payment for an FHA loan is
3.5%. With a score between 500 and 579, you'll need a 10% down payment.
FHA requires borrowers to pay a one-time up-front mortgage insurance premium
equal to 1.75% of the home loan. You
also owe annual premiums, which are divided by 12 and added to each month's
mortgage payment. Premiums range between 0.80% and 0.95% depending on the
length of the loan and the size of the down payment.
will need to pay your annual PMI cost (paid on a monthly basis) for either 11
years or for the whole time you have the FHA mortgage, depending on your original
loan amount and the size of your down payment. See these charts from
the Department of Housing and Urban Development to find out if you'll have to
pay forever or can stop paying mortgage insurance after 11 years have passed.
VA does not require a down payment or mortgage insurance. However, there's a
funding fee charged, which is equal to a percentage of the loan. Fees range
between 1.25% and 3.3% depending on how great your down payment is and whether
you're in the National Guard, reserves, or regular military.
down payment is required for USDA loans. There is an up-front fee equal to 1%
of the loan amount, and mortgage insurance totals 0.35% of the loan balance
annually. You'll need to pay this 0.35% fee for as long as you have the loan.
requirements to qualify for a mortgage
your finances in order is the first key requirement of getting a mortgage, but
there are other steps you'll have to take, too. For example, you'll need:
home appraisal: The appraisal is necessary to determine the value of the
home you want to buy so that the lender can determine whether you meet down
payment requirements. The appraised value is also used to determine how much
the bank will lend. If you agree to pay $300,000 for a home but the appraisal
says it's worth $250,000, then the bank will base the terms of your loan on a
home value of $250,000 and will not lend more than the home is appraised for.
inspection and a survey: Most mortgage lenders require that you arrange an
inspection to make sure the home is structurally sound and a survey to ensure
everyone is clear on exactly what you're buying.
insurance: Title insurance protects you -- and the bank -- in case it turns
out there's a dispute over exactly what you've purchased or in case there are
outstanding claims on the property, such as a tax lien.
insurance: You typically must provide proof that you've secured insurance
on the home you're buying in order to close on a mortgage loan.
costs: Most lenders want to see that you have money in the bank to cover
closing costs. Typical closing costs total between 2% and 5% of the purchasing
price of the home.
you come to closing, you will need a bank or cashier's check for your down
payment and other costs. You can't bring a personal check to closing.
home is a big deal
a home, and qualifying for a mortgage loan, is a big deal. You're making a
long-term commitment to repay a substantial amount of money over multiple
decades. Banks impose many requirements to make sure you're ready, and you
should also take steps before making a home purchase to confirm you're fully
financially prepared to take on this big responsibility.
you are, owning a home can be a good way to build wealth. If not, your purchase
can lead to financial disaster.
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