In order to get approved for the best mortgage possible you will need to prove income, credit score, low debt-to-income ratio, and have a healthy down payment saved up. There are mortgages available for people with poor credit or little to no down payment, but these loans are going to cost you in extra insurance and higher interest rates.
Prior to the 2008-09 housing crises it was very easy to get approved for a mortgage, in fact banks were handing them out like free candy. Backlashes from these poor practices were felt hard all across the country, resulting in big policy changes that continue to impact lending habits even as the housing economy shows great improvements.
That’s not to say you won’t be approved for a mortgage. In fact, many people are surprised to find out they qualify for a mortgage. Even if you don’t qualify today, there are things you can actively do to ensure you will be approved in the coming months or years.
What Do You Need To Get Approved For A Mortgage?
Prior to filling out an application for a mortgage be prepared to prove:
- Your total monthly income. Lenders require at least two weeks of pay stubs. If you are self-employed the underwriting process tends to be more involved.
- How much you spend paying off debts each month (auto loans, student loans, minimum credit payments, etc.)
- Your credit score, which should be over 620.
- How much total cash you have to put down on a home.
- How much you can afford to spend on a house. (Our mortgage calculator can help you to determine that: http://listings.curriproperties.net/idx/mortgage)
Reduce Your Debts
Prior to applying for a mortgage you should avoid taking on any large debts, such as an auto loan for a fancy car. The amount of debt you are currently paying off each month will impact how much loan you are approved for. If you have any smaller credit card debts pay these off prior to applying in order to free up more of your monthly income. The less overall debt you have the more money you will qualify for.
It may be impossible to do anything about the debts you already have but make sure that you don’t apply for new credit in the months leading up to your mortgage application. If banks see that you are collecting a lot of new debt they may become suspicious. Even if your mortgage lender sees something as small as a credit check for a new cell phone plan they may require a letter of explanation.
Let’s Talk Credit: What’s A Good Credit Score?
A common question people ask: What credit score do I need to be eligible for a mortgage? According to FICO, the median credit score in the US is 723, which translates to delinquency around 5% of the time. Credit scores between 740 and 850 are considered excellent credit, and are rewarded with easy to obtain credit with the lowest interest rates. Rest assured, you don’t need an excellent credit score to be approved for a mortgage. But, having an excellent score will earn you the lowest interest rates possible.
In order to qualify for a mortgage your FICO credit score should total at least 620, but in order to score a better interest rates you need a score over 700. The higher your credit score the less you are going to pay for your mortgage in interest, which can total thousands upon thousands of dollars.
If your credit score is slightly below 620 but you still want to buy a house, you may want to consider a government-insured FHA loan. These loans are meant to help people with lower credit scores and minimal down payments obtain a mortgage. It’s important to remember that this assistance comes with much higher interest rates and overall costs.
How Much House Can You Afford?
The traditional model states you should spend no more than 35-45% of pretax income on your mortgage, property tax and home insurance combined. Bank of America will not allow your total debt (this includes car loans, student debt and all other debt) to reach any higher than 45% of your pretax income.
Those that are very conservative say that your total mortgage and other house-related expenses should reach no more than 25% of your after-tax income. You have to find the right balance that you are comfortable with. Taking into consideration all other financial responsibilities you have in a given month.
How Much Down Payment Do You Need?
The down payment you save up will play a huge factor in your total monthly mortgage payments. Most mortgage lenders require at least a 10% down payment unless you are approved for a special program such as an FHA loan which only requires 3.5% down. While 10% down payments may score you approval, putting down 20% will greatly reduce your monthly mortgage payments.
By putting down 20% you avoid paying the hefty costs associated with private mortgage insurance (PMI). This insurance is mandatory for buyers putting down less than 20% in order to protect the lender against the buyer defaulting into foreclosure before putting sufficient equity into the home.
The Benefits Of A Co-Signer
If you don’t have the best credit you can benefit from enlisting the help of a co-signer with good credit. A co-signer can help you avoid expensive mortgages or getting denied altogether. This person is responsible for the debt if you default on it so it may be difficult to find someone that is willing to put his or her finances on the line like that. Generally, parents or other close relatives are the only ones willing to make such a big risk on your behalf.
It never hurts to ask!
Curri Properties is here to help you purchase a home every step of the way. Contact us today to get started on your dream home search.