Mortgage qualification depends upon many criteria, one of which is your personal financial situation. Other factors that affect your ability to secure an attractive mortgage include your credit score, your stated plan to utilize the property, length and amounts of the loan, the size of your down payment and the state that you live in. To obtain a good mortgage, contact several lenders to get a variety of offers, so that you can choose the one that best suits your individual needs and financial conditions. Before obtaining a mortgage, it is better to have a preapproval letter, which will make your home search a lot easier and will make a big impact on your purchase offer to the seller of the house.
To obtain such preapproval, you will need to take several steps, and there may be fees involved. Before applying for a loan, check your credit score. Once you are satisfied with your credit score, educate yourself about the loan you’ve selected and its terms and conditions. Most importantly, you need to calculate and verify yourself that the loan you have chosen will have monthly payments that are affordable to you. An affordability calculation can be done via online mortgage calculators. In general, unless you can make a significant down payment (e.g. 20%), you should expect to pay higher interest rates as well as private mortgage insurance (PMI). However, there are some loans to help people who cannot afford such a down payment, such as private mortgage loans, FHA loans and “piggyback” loans.
Self-employment mortgage preapproval
Self-employment presents some unique challenges to those looking to secure a mortgage.. To prequalify, self-employed individuals need to document their income, develop and maintain good financial habits, and have a consistently high credit score to obtain a suitable loan. If you and your spouse jointly apply for a loan, you will qualify for a larger loan amount due to the combined debt-to-income ratio. However, if one of you has a bad credit score, it will be difficult to get a low interest rate. If you work together in advance before applying for the loan and take the necessary steps to improve the low credit score, over time it will help you obtain a lower interest rate loan when you apply jointly
Lenders usually provide loans based upon the borrowers’ credit categories, which are divided into Plus, A, Alt-A, B, C, and D. The best credit category borrowers fall under the “Plus” category and they obtain mortgages with the most advantageous terms. Their scores are 720 and above. Credit scores less than 560 often mean that the borrower has to pay a higher interest rate if they aren’t denied outright. If you fall under the latter category, you may need to repair your credit score over a period of a year or two. However, you don’t always have to do that.
There are several products endorsed by Federal Housing Administration (FHA) for single families, such as the FHA 203 K. Additionally, there are special lending institutes that sanction low credit score mortgages with a higher interest rate, provided that your application is supported by W2s and other documents. Lenders normally review many different types of documentation in order to assess the borrower’s ability to repay the loan. In order to verify your affordability, lenders may ask to do any of the following:
● Verify previous paycheck stubs, W-2s, and federal tax returns for income verification.
● Call your landlord to verify rental payment.
● Seek documentation from your bank accounts and investment accounts.
● Verify other sources of income (for example, alimony and child support, etc.).
● Check monthly payment of your vehicle(s), student loans, and any credit cards.
What interest rate will you get?
Many home buyers are puzzled when they realize they do not qualify for the great interest rates they see advertised online. The simple truth is, the interest rate you will be offered will be determined by your personal financial situation. Although you may not be eligible for the best rate out there, that does not mean you will not be able to get a good rate or a rate you can afford. The interest rates you will be offered will depend on the following criteria:
● Credit score – Your credit score is a numerical representation of your finances, including credit cards and other loans, and the way you have handled them in the past. The higher your score, the better the interest rate you will be offered.
● Type of property – Interest rates are affected by the type of home you are looking to buy. You generally will be paying a higher interest rate if you intend to rent out than if you plan on living in the home (i.e.investor/landlord vs. owner-occupied).
● Loan term – Typically, the longer term of your loan, the higher the interest rate will be. So, if you opt for a 15-year loan, you will probably be paying a lower interest rate compared with a 30-year loan.
● Loan amount – If you opt to borrow more than $417,000 for your home, it will be considered a non-conventional loan. You will be paying a higher interest rate for this type of loan as well.
● Loan-to-value (LTV) ratio – If you have a small down payment, or not much equity in your new home, you are more likely to pay a higher interest rate. Your loan-to-value ratio is the amount of the mortgage divided by the value of your home, or the home you wish to purchase.
● Location – Interest rates will vary from state to state and from lender to lender.
It is a good idea to find a mortgage offer that will suit your exact individual needs and finances. Make sure you try multiple lenders to ensure you are getting the best deal.
Importance of being preapproved and the steps involved
Getting preapproved for a mortgage can help you be chosen by the sellers of that new house that is a perfect fit for you. Here’s what you need to do to get that preapproval and increase the likelihood of the seller accepting your offer.
1. Find out how much you can afford to spend. Lenders have created much more strict guidelines on loan qualifications within the past few years. They will require documentation that will show your assets and income, they will want to review your debt, and pull your credit score.
2. Find out your likely interest rate and monthly payment. Taking the time to get preapproved for a loan will help you out in several different ways. This process will introduce you to the loan application process, and will inform you on the different types of loans available along with the interest rates and monthly payments that could be offered to you. This all will depend on your personal financial situation. After getting a preapproval, you will be ready to make an offer without waiting. Having a preapproval letter sends the message to home sellers that you are serious about purchasing a new home, and have the means to do so. It often improves the chances the seller will approve your offer.
3. Get prequalified and preapproved. You will need to answer some basic questions about your financial situation, and upon completion, the lender will review all of your financial records and ultimately get you preapproved for a loan. These preapprovals are just a preliminary step, however. The loan will still need to be finalized and be accepted before you can buy your new home.
3 important things to remember before applying for a loan
It pays to educate yourself before any major financial purchase. Arm yourself with knowledge, and you might end up saving yourself a lot of money. Consider these three critical parts of the home loan process.
1. Your credit rating, also known as a FICO score: before any lender will give you money, they want to feel comfortable that you will ultimately pay back the loan. It does not matter how big the loan is or whether it is for a house, a car, or a stereo. Your credit rating, or FICO score, is the basic foundation on which your credit will be judged. Your credit rating will reflect any poor financial decisions you have made. If you have a poor credit rating, you may want to wait until you can improve your credit before applying for a mortgage for a home. Remember, higher FICO scores can and generally do mean a better interest rate.
2. The cost of borrowing: make sure you know which type of loan you are applying for, typically either a fixed-rate loan, or an ARM (Adjustable Rate Mortgage). You will want to understand the long-term effects of both types of loans. Make sure you educate yourself on the current interest rates, fees and any other charges that may apply. Carefully examine the difference in what you are borrowing and what you will end up paying back in interest over the course of the loan.
3. How much you can afford: you do not want to end up paying more for a loan that you have to. There are several online tools at your disposal, such as an online loan calculator. Make sure to check all the different avenues you can for the loan, and the options you have. Do not forget to factor in property tax increases, or any unexpected expenses that could hit you down the road. Remember, life happens.
Low down payment options for buying a home
Have you found the home you love, and would like to purchase, but are unable to come up with the down payment? There are several options for you to look into.
● Private mortgage insurance – You may able to get away with a small down payment of as little as 4 percent by taking out private mortgage insurance. This insurance will protect the lender in the event that you default on the loan. Usually the PMI (Private Mortgage Insurance) is about one-half of a percent of the loan. However, after you have reached the point of having twenty percent equity in your home, either through making payments or through a change in value of your home, most lenders will allow you to drop the insurance. Sometimes the PMI can be included with your mortgage loan, but you should expect to pay a higher interest rate.
● FHA loans- The Federal Housing Administration (FHA) administers loans designed for people with less than perfect credit. These loans are insured through the FHA and often times will allow a very low down payment. There will be a limit on the amount you can borrow, which varies by where you reside in the country. You will be required to take out FHA insurance, and this amount can be rolled into the mortgage. Also, government-insured loans are available for people with military service under the VA (Veterans Administration) loan program. Finally, there is a Rural Development Housing and Community Facilities Program for rural residents.
● Piggyback loans – Piggyback loans are designed to close at the same time as your mortgage. This will allow you to pay the down payment needed for most conventional mortgages. Keep in mind that, with this arrangement, you will have two mortgage-related bills to pay every month. The interest rate on the piggyback loan likely will be much higher than that of the mortgage loan. Your total payments could be lower than by going with a PMI. However, the interest rate on the piggyback loan may be tax deductible, so make sure to ask a tax advisor about your situation before you make a decision.
Qualify for a mortgage being self-employed
Self-employed people may be caught in the ever-tightening guidelines required of and by lenders, due to the well-established problems with the lending industry. Typically, self-employed people will have fluctuating income from year to year, making them appear to be a credit risk.. As far as taxes go, many do not receive W-2 forms, and after they deduct business expenses from the income, it appears as though they make little or no money. Fortunately, it is easier to get a loan today than it was ten years ago, for the self-employed.
The most important thing in your consideration for a loan isyour credit score, or FICO score. Make sure to check your credit reports annually, and from all three major credit reporting agencies; Transunion, Experian, and Equifax. If you have poor financial habits that are causing your credit score to drop, change those habits now! You can not fix your credit score in 90 days; it will take six months, or even up to a year.
If you are self-employed, make sure you keep good records, as the lenders will ask you for even more documentation than someone who has steady work and who can provide a W-2. You may want to consider hiring a certified public accountant to prepare a statement for you. This may cost several hundred dollars, but it may be worth the cost if you are looking for a mortgage.
Do not forget to get prequalified for a loan so you will know how much of a home you can afford. As long as you handle your finances correctly and keep good records, getting a mortgage should not be too difficult.
Are you able to afford a home?
You may be ready to purchase a new home, but do you have room in your budget? Read the following information carefully to see if a new home will be a fit for you.
The more you can put down on your mortgage, the better interest rate you will receive, along with having a lower monthly payment. 20 percent is usually the least you can put down to avoid having to buy private mortgage insurance (PMI). 10 percent would be a great start, and would still offer a nice interest rate, but ultimately you would probably still have to pay for PMI. You will also need to make room in your budget to cover all other closing costs. Make sure to look over your Good Faith Estimate, as these additional costs will be listed there.
When you apply for a mortgage, lenders will look at your debt-to-income ratio to make sure you are not biting off more than you can chew. Usually the maximum amount they want to see is 28 percent going towards your mortgage, homeowners insurance, and property taxes. For example, if you are looking at a $220,000 home, and you put down 20 percent, your mortgage would end up being $176,000. This would make a monthly payment of about $1000 and after adding taxes and insurance would boost it up to around $1500. You would need to earn about $65,000 a year to cover that 28%.
Lenders will look into your employment history as well. They will want to see at least two years of employment stability. If you just recently started a new career, even if it’s a better career than the one you left, it may not be the best time to search for a new home. If you happen to be self-employed, you may still be able to procure a mortgage; however, it will be a bit more difficult, especially if you do not document your income.
If you are already carrying a lot of debt, lenders will frown at the thought of allowing you to borrow more money. You do not want more than 36 percent of your income going to your debt, including the 28 percent maximum for the mortgage, taxes and insurance.
A favorable credit score will be key in getting a mortgage. The lower your credit score, the lower chance a lender will take a risk on you. A score of 720, on the other hand, would earn you a favorable interest rate.
Does your spouse have bad credit?
If you happen to have a spouse with poor credit, while you have great credit, you might wonder if applying for a mortgage loan yourself would be a better move.
Applying for the mortgage yourself would provide some benefit when it comes to the interest rate a lender would offer you. However, the amount the lender will want to loan may not be the figure you are looking for. If your spouse is the big earner in the family, you may find that you are unable to get a loan for the house you desire without their name on the mortgage.
You could become joint owners of the home and list both names on the mortgage. You may find yourself with an offer with a higher interest rate than if you applied alone. However, the lender will look at both of the buyers’ debt-to-income ratio and will consider both parties’ earnings, and you may find yourselves able to borrow more.
Now, if you are lucky enough to have saved up a considerable down payment on your desired home, about 25-30 percent, you may want to look into getting a stated-income mortgage. With this loan, you will be required to state the nature of your income, but may not have to document the income. This could possibly allow you to borrow more. Your interest rate for this type of loan is slightly higher than a traditional mortgage, but it may be lower than if you both attempted to apply for the mortgage together. If you were to fail on the mortgage, you would be solely responsible as the only borrower.
Your best bet is to work with your spouse and improve their credit. Over time, their credit rating would improve, allowing you to apply jointly for a mortgage and receive a great interest rate in addition to being able to get the loan amount you desire.
Debt to annual income ratio
Some lenders will provide loans to those with a higher debt-to-income ratio, but the loans may be smaller than they’d normally offer or they may charge a higher mortgage rate on the borrowed money. Federal Housing Authority loans allow a debt-to-income ratio of up to 41 percent, but require that you pay an additional monthly fee for mortgage insurance. Remember, just because you can get a loan with a high debt-to-income ratio does not mean you should. It may be better for you to borrow a smaller amount of money.
Your best bet is to try to pay down as much outstanding debt as possible before applying for a mortgage or line of credit. You can also reduce the cost of high-interest monthly credit card payments by applying for a lower-interest debt consolidation loan.
Your credit score dictates the mortgage you get
If you’re wondering how lenders decide which loan products to offer to which borrowers, you might want to learn more about mortgage credit categories, which include Plus, A, Alt-A, B, C and D.
Having a higher credit score can make your loan process go a lot smoother. If you are in the Plus category you typically are offered the best interest rates and terms. These borrowers usually have a credit score of 720.
The next two categories, the A and the Alt-A, will usually be offered the next tier of interest rates. These borrowers typically have a credit score of 680-720 for A, and around 650-680 for the Alt-A. The difference in these two categories could be as little as 10 credit points, and might make the difference in what documentation you will have to procure for the lender.
The final categories, B, C, and D generally will come with higher interest rates and will include higher closing costs to compensate the lender for taking a higher risk on lending.
Some lenders will use the terms prime and subprime to describe a borrower’s financial risk. Typically, a prime candidate will be in the Plus or A category, where the subprime borrowers will typically be in the B, C and D range.
Having a hefty down payment will help to offset any high interest rate offers. There are several factors that will determine the offer you are given. Your ratio of monthly debts to your monthly income will be more heavily considered for borrowers with lower credit scores.
The most important things your lender will look at most closely are your credit score, loan-to-value ratio, debt-to-income ratio, and which credit category you fall into. The less risk the lender sees in your financial situation, the more money you’ll save when obtaining a home mortgage.
Obtaining a low credit score mortgage
If your credit score is low, a bad credit mortgage may seem like the way to fulfill your dream of buying a house. Here are some things to consider if you are thinking of taking out a mortgage and you have a flawed credit history.
A mortgage is a very serious item in your credit profile. If you have a lower credit score, it is more than likely due to previous issues with debt. Remember, obtaining a mortgage will increase your debt and responsibility. You will have monthly payments and be expected to make a down payment. There are closing costs to consider as well as the new costs you will have as a new homeowner. Before you get a mortgage, consider whether now is the best time. You may want to give yourself another year or two to repair your credit.
If you have poor credit, the loan you are approved for will not necessarily have the characteristics you are looking for. Lenders will examine your credit score to see your credit worthiness and will make an offer based on the score. A low credit score may tell potential lenders that you will continue your bad habits, and, to offset this risk, lenders who offer a bad credit mortgage may charge you a higher mortgage interest rate.
There are several options out there for people with poor credit scores, such as Fannie Mae and the Federal Housing Administration (FHA). Fannie Mae provides funds for one out of every seven mortgages. You may also want to look into programs from the National Foundation for Consumer Credit. These organizations can inform you of your options and offer the advice you need to turn your dream of owning a home into a reality without getting in over your head.
Minimum credit score needed for a mortgage
The final decision on whether to give you a mortgage lies with the lender. Lenders consider other factors in addition to your credit score. You may still get a mortgage with a score as low as 500. In fact, some lenders specialize in loans to borrowers with low scores. However, the lender will likely ask you to produce extra documents such as bank statements and W2s to support your application, and you may have to pay a higher interest rate.
It is a good idea to check your credit score regularly, and it is just as important to keep on top of your risk factors. There are several things that concern lenders. The most significant negative item is having a delinquent bill payment record. Working to improve that record can make it easier to get a mortgage at a lower rate.
When requesting a credit report from a credit agency, make sure you ask for both a credit score and a credit report. Some lenders will provide you with a risk factor statement if you ask for one.
You should also be aware that not all lenders use the most widely accepted FICO scores to make their lending decisions. Some use scores from other agencies such as Scorex, and others use FICO scales that are customized to fit their own methods of risk assessment. So, it’s possible that different lenders may quote different scores when processing your application, even though they indicate the same creditworthiness in the end.
Minimum prerequisites for lenders to approve
If you are finally tired of renting and want to own your own home, you should familiarize yourself with what lenders are looking for in new potential borrowers. You don’t want to be surprised when you apply for a loan. Educate yourself and apply for a mortgage with confidence.
● Down Payment – A handsome down payment will get lenders’ attention. It will be one of the first questions they pose when you are starting the mortgage process. They will weigh the down payment against the overall cost of the home. This is known as your loan-to-value ratio. They will weigh the amount you want to borrow against the value of the home you are looking to buy. The percentage you are looking for in the LTV ratio is about 80 percent. If you have an LTV ratio of higher than 80 percent, you will most likely need to obtain private mortgage insurance. Putting down at least 15 or 10 percent down will supply some equity in your new home. Lenders will want proof that these funds exist, so have your bank statements handy.
● Limited Debts – Lenders will typically look at your monthly debt and require no more than 36 percent of the income going towards your current debt. Lenders look at the DTI (debt-to-income) ratio and will determine how much you can afford to borrow. Credit cards are factored into this equation using their lowest monthly payment, not the balance you owe every month. Your total mortgage payment will include taxes and property insurance, which is then considered when determining how much you can reasonably afford each month.
● Credit History – Your credit score is a critical factor in establishing your ability to repay credit. A credit score of 720 or higher should earn you the most favorable interest rate. If your score is below 720 but above 675, you probably won’t be offered the best rate, but you should still be able to find a good loan. If your score is below 620 you may fall into the subprime category, which means it may be more difficult to find a loan with a low interest rate. All Americans are entitled to one free credit check a year. Be sure to check your credit score three to six months before applying for a mortgage, so that you have enough time to correct any problems. To get your actual credit score, you can visit one of the three major bureaus Equifax, Experian and TransUnion. Your bank, credit union, or credit card company may also provide credit scores on a monthly or yearly basis at no cost to you as well.
● Employment History – Job history will play a key role in your eligibility for a home mortgage. Lenders like to see someone with stable work history, keeping the same job for two or more years. However, some employment changes are looked upon favorably, especially if they result in higher income. If you are self-employed, you will most likely be required to provide more documentation on your financial situation, such as personal and business tax returns.
Buying a home is a great investment and should not be a decision taken lightly. Just make certain you have your financial situation as stable as possible when applying for your mortgage and arm yourself with the confidence needed to qualify.
Co-signing for a mortgage
If you are self-employed, it will be easier to obtain a mortgage with a co-signer, but not necessarily needed. Lenders will want to see proof of regular income, thus making it more difficult for the self-employed to get approved for a mortgage.
If you have kept all of our financial documentation, have been self-employed for some time, and can submit your tax returns, you may qualify for a conventional mortgage. Many lenders also offer mortgages that don’t require full documentation. With a no-income, no-asset (NINA) mortgage, for example, you don’t have to disclose what you earn or where it comes from. In a stated-income mortgage, you will need to declare the nature of your employment and your typical annual earnings, but may not be required to provide documentation to prove it.
You will need to have a great credit history to be approved for these loans, and typically will be required to supply a significant down payment. They also carry higher interest rates than traditional mortgages. NINAs are typically priced 1 percent to 3 percent higher than traditional home loans, while stated-income mortgages may be only half a point or so more.
If you are unable to get approved for one of these mortgages or are unwilling to pay the higher rates, you might consider asking someone to be a co-signer. This involves asking another person to share the responsibility of paying back the loan. The co-signer must be able to meet the qualifying requirements that you cannot, such as having a high credit score or a documented income level.
Anxiety of obtaining a home loan
It’s only natural to feel some nervousness when looking at getting a mortgage. Applying for a loan can be one of the most stressful situations you will deal with in your lifetime. A home loan is a big step and not to be taken lightly. Keep in mind, some lenders, as in any given trade, may not have your best interests in mind. But, with a few simple steps, you can set your mind at ease and move forward with your dream of home ownership.
● Be Prepared – Know exactly what you are looking for, and what your long term goals in home ownership will be. Present your scenario to your loan representative. Go over your personal financial situation and decide on an amount your budget will allow on spending for a new home. Do not forget things that are often forgotten in homeownership, like maintenance, utilities, and any association dues.
● Ask Questions – Your first conversation with a lending professional should be more of a fact-finding mission than a commitment to a loan through that loan representative. Prepare a list of questions you want to ask, and pay attention to whether the loan officer listens to your needs and replies to your questions with information that you understand and beneficial to you. Make sure you keep notes on the conversation as you will be needing them later when you interview other lenders.
● Set Expectations – Make certain the loan officer knows you are in the information-gathering process and ask the loan officer what services they provide and what they specialize in. Make sure the lenders know you want to be kept informed about the progress of the loan. If you decide to submit an application, make sure the loan officer explains the application to you and the disclosure document as well.
● Mortgages are not free – You should expect to pay reasonable and customary costs to the mortgage representative, and you should receive a government-mandated Good Faith Estimate (GFE) of those costs before your loan closes. Tell the lender you do not want any surprise charges when you sign the loan documentation.
● Say no – You can always say no, turn around, and walk away if you feel uncomfortable during the preliminary conversation. In fact, you can turn and walk away after you submit your application. You may have to pay the application fee and any appraisal fee, but it will save you frustration in the long run if you feel uncomfortable at all.
● Weigh your options – Look into all the options you have available to you, and shop around. There are many lenders out there looking to earn your business. Look beyond the amount of the monthly payment, and consider all the terms of the loan and how it will support your future financial goals. It is also important to factor in how comfortable you are with the level of service you feel the lender will provide.
● Use trusted sources – Be patient, gather information, and make educated decisions, as this is a long term financial commitment. Keep your homeownership goals in mind and take it slow. There is no need to rush.
Documents commonly requested by lenders
Lenders will want documentation from you so they can properly assess your ability to repay your loan, start a document trail for audit purposes, reduce incidents of loan fraud, and create the ability to sell your loan to investors. Take a look at what to expect as part of that documentation process:
● Income Verification – The lender will ask to see your paycheck stubs, W-2s, and federal tax returns to verify the income you stated on your application. Typically, the lender will phone your employer to verify numbers and the length of employment. Your lender will be concerned that you can’t make the loan payments if you overstated your earnings. They will look at your tax returns to see if there is any additional information you did not disclose on your application.
● Rent Payments – If you currently rent your home, the lender likely will contact your landlord to verify your history of rent payments. This verification is another way for the lender to assess your creditworthiness.
● Account Statements – Lenders will ask for documentation from your bank accounts and investment accounts. They will want confirmation that the money exists for the down payment and closing costs. Some lenders will require two months of mortgage payments on hand in case of financial problems.
● Alimony and Child Support – If you included spousal or child support as a source of income on your loan application, the lender will want court documents to verify the amount and duration of those payments. Your divorce settlement also helps the lender understand any joint accounts that might still appear on your credit report.
● Debt Verification – The lender will want information on the monthly payments of your vehicle(s), student loans, and any credit cards. These obligations will reduce the amount of free income you have available for the mortgage payments. If you have declared bankruptcy within the past year, they will most likely require a letter of explanation and proof that your bankruptcy has been discharged.
● Profit-and-Loss Statement – If you’re self-employed, the lender may demand an accountant-certified profit-and-loss statement for your business. This statement shows the income and expenses of your business and again is used to verify the information on your loan application.
If you are unable to furnish the documentation required, ask about a ‘no-doc’ or ‘low-doc’ loan. This will involve less paperwork but will more than likely give you a higher interest rate.
How to look attractive to lenders
There are several things you can do to make yourself more appealing to lenders. Here is a list of a few of them:
● Pay Bills On Time – If you do not have a budget, make sure to create one and start living within your means. Lenders will look into how you manage paying your bills on time. Just one missed payment or one paid later than thirty days may stay on your credit report for up to seven years. Even with a not-so-perfect credit history, one that reflects a good recent credit history may catch the eye of lenders. Having a poor credit score will not make it impossible to get a loan; however, lenders will reserve the better interest rates for borrowers with stable history of handling debt.
● Avoid Excess Credit – Having too much credit will hurt your rating. You will want to keep a small number of credit accounts to help maintain and build your credit. Do not add new accounts shortly before applying for a mortgage. To a lender this will look like you are loading up on credit. Make sure to keep your credit balances on the lower side. Lenders will look at your debt-to-income ratio and will want a number no higher than 36 percent.
● Check Your Credit Report – It is never a poor decision to check your credit. It is very important to check your credit 60 to 90 days before applying for a loan so you can fix any errors. Even the smallest flaw could hurt your chances of getting a low interest rate for a loan and affect what amount you can borrow.
● Pay Down Your Debt – The best way to improve your credit score is to pay down outstanding debt. Concentrate on high-interest debt such as credit cards. The creditor may be willing to help you set up a repayment schedule. Consolidating your debt into one lower-cost loan may also help, or you may want to consider working with a reputable credit counselor. Improving your credit score will not happen overnight, it will take time, usually several months.
● Apply For a Smaller Mortgage – Applying for a smaller mortgage makes it easier to get approved for a loan. Payments will be smaller, and there will be less risk to the lender. You will have to settle for a less expensive home, or come up with the means for a larger down payment.
● Keep Your Job – Your employment record is also part of your credit profile. Lenders prefer a reasonable period of stable employment, so if you’re intending to take time off or change jobs, it may be better to wait a while.
What is the difference of being pre-qualified versus pre-approved
The first step is getting pre-qualified. You will be asked to provide a lender with basic information regarding your current living situation, your debt, income and other finances. The lender can usually give you a ballpark of what you will be approved for in a loan and usually at no cost to you.
Getting pre-approved is the next step. The process requires that you complete a mortgage application, usually paying an application fee, and supplying a lender with all the necessary documentation to check your financial background and credit rating. You will then be told the exact mortgage amount for which you are approved.
The obvious advantage of completing both of these steps before you look for a home is knowing in advance how much you can afford to spend. You won’t waste time looking at properties beyond your budget. The initial pre-qualification stage allows you to discuss with your lender any goals or needs you may have regarding your mortgage. He or she can then explain your mortgage options and recommend the type that might be best suited to your particular requirements.
Getting pre-approved for a mortgage also enables you to move quickly when you find the home of your dreams and make an offer that is not contingent upon obtaining financing. It also lets a seller know your offer is serious and could prevent you from losing out to another purchaser who already has financing arranged.
Employment requirement for mortgage lenders
Your employment history and status is a vital part of the loan approval process. They like to see two solid years of employment steadiness; however, they will also look at the size of your down payment and your credit score, among other factors.
Lenders prefer steady income. It could be an annual salary, or working a set amount of hours a week for the past two years. This vastly improves the chances of you getting approved for a loan. If you have recently changed jobs, but are in the same field, it will look favorable on your employment status. Of course, there are other factors that will ultimately help you secure financing.
If you are self-employed, or work on commission with fluctuating income, lenders will be concerned about your ability to meet your monthly payments. You will need to prepare yourself to show appropriate documentation to support you have held the same position for the past two years. Have your tax returns ready, and if you are self-employed, have your business’s financial statements ready to submit.
You can still be approved for a mortgage even if you are self-employed. Lenders are not blind. They understand that today’s economy has created many different unconventional jobs. There are mortgage products that are designed to suit these type of borrowers with irregular or erratic income. Typically these mortgages will carry a higher interest rate to help cover the lender’s risk.
Your employment status is only one factor of many that lenders will consider. A good stable work history will increase your chances of being approved for a mortgage loan.
Getting a subprime loan
If you are thinking about taking out a poor credit mortgage, consider the implications. Your new loan payment will probably take up most of your income for several years. If your credit is flawed, a mortgage payment added to it may push you further into debt.
Consider the Timing – If you currently have poor credit, your best bet would be to improve your finances and debt and wait until you have a better credit score. Waiting just one year will improve your chances of getting a loan and an interest rate you desire. Keep in mind, lenders will see that you have had trouble controlling your debt in the past, so approving you for a large loan would not be in their best interests. If you are unable to pay on time, or even make the minimum payment, you could damage your credit even more.
Shop Around – If getting a loan now is a financial necessity, you should take the time to shop and look into all of your options. Chances are, if you have a low credit score, you won’t get the lowest interest rate or the highest loan amount. Talk to different lenders and see who will give you the most affordable rates and terms so that you can manage your purchase and not worsen your credit rating. Shopping around is a good thing: do not limit yourself to one lender just because they look promising.
Clean up Your Finances – What is broken can always be fixed. You will have to change your spending habits, start paying bills on time, pay down your debt and maybe even eliminate some, and stick to your financial budget. Fixing your credit may allow you to refinance your mortgage in the future.
Who can qualify for an energy efficient mortgage?
An Energy Efficient Mortgage (EEM) allows you to buy a more expensive home than you could have otherwise. An energy-efficient home incurs significantly lower monthly utility costs than its non-energy efficient counterpart. Less money spent on heating and cooling each month leaves a larger percentage of your income available for your mortgage.
Although it does not require a special buyer, an Energy Efficient Mortgage does require a special house. To see if the house you’re interested in qualifies, you must have a HERS report (Home Energy Rating System) done. Similar to the miles-per-gallon rating on a car, the report tells you how energy efficient a home is. In a HERS evaluation, several factors are examined: the home’s insulation, the efficiency of the appliances, the window types, the local climate, and the utility rates.
A trained Energy Rater conducts a HERS report and provides the home’s overall rating, recommends upgrades, indicates what the improved rating score will be after upgrades and estimates total energy used before and after upgrades. The lender uses this information to determine whether to give you an Energy Efficient Mortgage.
Additionally, improvements that make a home more energy efficient can sometimes qualify for an Energy Efficient Mortgage. If you will save enough money each month to justify the investment, some lenders will consider increasing your loan to pay for renovations that will make your home energy efficient. These changes will often increase your home’s resale value as well.
Understanding loan-to-value ratio
Lenders will calculate this percentage to determine if you qualify for a loan. After factoring in the down payment, lenders will want to know how much of the home you intend to finance. The loan-to-value (LTV) ratio is how much you are asking to borrow against how much the home is worth.
To find the LTV, you would simply divide the amount of the mortgage by the appraised value of the home. This is important to lenders because the higher your loan-to-value ratio, the lower home equity you will have. Low equity, to a lender, represents a higher likelihood of your defaulting on the loan.
If you are taking out a mortgage with greater than 80 percent LTV, you will be required to pay for private mortgage insurance (PMI). This will protect the lender in the event you default on the loan.
Lenders will typically charge you a higher interest rate on high LTV loans and most often will require a second appraisal on the home before signing off on the mortgage.
To avoid potential problems, keep in mind what LTV is and factor it into your search for a new home. Getting pre-approved for a mortgage before you start house hunting will give you a budget you can afford.
Do I need an escrow account with my mortgage lender?
What is an escrow account? An escrow account is an account held by a third-party agent who represents both the borrower and the lender. The borrower will make scheduled deposits into the account, usually set up automatically within the mortgage. When property taxes and the home insurance are due, the third party will release the funds to cover that amount. This helps you as a borrower, as coming up with a large lump sum for those yearly payments may be a challenge. It is much simpler and easier to have the payments spread out over a twelve-month period. Plus, you will have the added benefit of not having any late payments or lapses in insurance.
More than likely, if your down payment is less than 20 percent, a lender will insist that you open up an escrow account at the time of closing. The lender is just protecting their collateral, your home. An escrow account will protect your home and your investment in several important ways:
● The property taxes will always be kept up to date and paid on time.
● Your home insurance will not lapse. This may not seem important, but you ALWAYS want to be protected in case of fire, natural disaster, or any of the numerous things that could affect your property
Lenders need assurance as much as you, the borrower. If you allowed your home insurance to lapse, and a severe storm hit and destroyed your home, the lender would be left with no collateral since the insurance is not in place to cover the costs. This is why lenders may insist on borrowers setting up an escrow account.
Think of an escrow account as offering peace of mind to you and your lender. Your premiums will be paid on time, and you will be financially protected.
When is my mortgage officially approved?
Your financing will not be finalized until both the borrower and the lender are approved.
Many borrowers mistake a pre-qualification letter or a pre-approval letter for being as good as money in the bank. This, however, is not the case. The two pieces are an important step in your approval, but they are only a preliminary indication that, if other conditions are met, you will be approved. Your financing will only be final once you receive an approval letter.
Preliminary approvals are just that: preliminary. They will show a home seller that you have the intention and means to purchase a home. But, it is not the same as having a final approval letter. The preliminary approvals are based on very limited criteria which may consist of as little as your credit score.
A pre-approval letter may be based on more information than a pre-qualification letter; however, sometimes different lenders use them interchangeably. Ultimately, much more information and documentation will be needed to get your final loan approval.
After receiving your pre-approval letter, in theory, as long as the conditions defined in the letter are met, you will get final approval. The conditions required for a final approval will usually be a credit score report, size of your down payment, or how much equity you have in your home. Those with great credit history and a good credit rating may get faster approval with little documentation needed. Most borrowers, however, will be subject to the lender’s review of more detailed information. Usually this information will be bank statements, tax records, employment history, and pay stubs. Lenders typically need at least a few days to collect and review all of the information they require before issuing a final approval.
A final approval may not be forthcoming if the lender cannot verify the information you provided or discovers any adverse facts about you or the home. Mysterious liens on the preliminary title report or an appraised value that’s less than the agreed-upon sales price are two examples of situations that might derail your loan even if you’re otherwise qualified.
A final approval should be unconditional. You have been approved for a set amount of funding, at a set interest rate. A final approval, unlike a pre-qualification or pre-approval, should mean your financing is secured.
The difficulties of obtaining a small mortgage
Many lenders will not even consider financing a first mortgage for less than $80,000. The reason? Smaller mortgages are not nearly as profitable as larger loans. Many of the fees associated with a loan are based on a percentage of the loan amount. A smaller mortgage may not be adequate to pay the lender’s expenses and the loan representative’s commission, much less bring in a profit from the loan. Remember, lenders are in it to make money.
Having said that, small-balance mortgages are available, though typically at a somewhat higher cost to the borrower. Likely sources include local community banks, credit unions and stock brokerage companies. These institutions may be more willing to originate small-balance mortgages because they keep such mortgages on their own books and earn interest over the years. They may also want to establish a broader relationship with the borrower, who could become a customer for other financial services.
Small-balance mortgages do not usually require great credit scores as larger loans will. Lenders will pay much more attention to appraisals of the home, however. A higher loan-to-value ratio on a less expensive home is much more risky than a high loan-to-value ratio on a more extravagantly-priced home.
Keep in mind, with a smaller loan, a longer term will not dramatically change your monthly payment because you are spreading out less money across just a few more years. A large loan would show a dramatic change in monthly payments from a term of 20 years to one of 30 years. A shorter-term loan would be smarter if you can afford it for a small mortgage.
What should I do if my mortgage application is denied?
No one wants to hear that their loan application has been denied, even though it is quite common among prospective homebuyers. Rest assured, it does not mean you will never be approved for a home loan. Remember to relax and not panic; this is not a personal attack on you or aimed at you. It may mean you are unable to afford the home you want, or will not be able to get it right away.
You will need to review your personal situation and find out why your application was declined. You need to know the exact reasons, so you can start fixing them.
If your application was denied because of poor credit, make sure to request free copies of your credit score. The best site for this is Annualcreditreport.com. Make sure to get all three reports, as some information will not be listed on each of the reports. Loan officers tend to be poorly trained in in individual personal financial situations. You may have to ask a close friend or a relative to help you sort out the report. You will then need to start fixing your credit. Do not use a service that claims to fix credit reports. They can do little more than you can do yourself.
Another reason your application was denied could be the debt-to-income ratio was too high. If this ends up being the case, you will need to augment your income, lose some debt, or a combination of both.
Some borrowers will instantly turn to another lender, which may fix your immediate problem but may not work out for you in the long term. They most probably will offer you a poor interest rate and a more expensive loan. Try fixing your personal financial situation first.
The dos and don’ts when applying for a new home loan
Most lenders will require a standard home loan application. Even so, there are some things to do and others to avoid in the home loan application process.
Some borrowers will forget to include alimony or child support as income, even though this additional income will probably help them pursue a larger loan.
Some borrowers will overstate their earnings from overtime, commissions, bonuses, or rental properties. For these sources of income to count in your favor they must be properly documented and earned for the past two years.
If you are married and do not want include your spouse’s’ name on the application, you can’t include their income either. Also remember that a borrower applying as a single applicant will solely responsible for the mortgage.
You can add a co-signer with good credit to strengthen your loan application. Keep in mind, the lender will make no differentiation between you and the co-signer. Any problems that arise will fall directly back on you both.
Always fully disclose your debts.
Make sure to list only the minimum payments required for your credit cards. Making higher payments is a good financial habit, but will not help you in getting a loan.
Do not forget to include court-ordered child support or alimony as debt.
Be up front and honest with the lender, as they will be more willing to work with you.
It is a good idea to avoid making any major changes to your financial situation after you apply for a loan. The lender typically will need to verify the information on your application before your loan receives final approval and any changes (e.g. new credit cards or an auto loan) could derail that process.
Documentation checklist for your lender
When applying for a mortgage you will need to supply the following information and documentation:
Name and address of landlord(s) for the past two years (if eligible).
Proof of all income from the past 24 months (e.g. tax returns, pay stubs).
Previous two years’ W-2 forms.
Copy of most recent year-to-date pay stub for all applicants.
Proof of all deposit accounts, checking, savings, money market, IRA and brokerage accounts.
Three months’ most recent statements for deposit accounts, stocks, bonds, etc.
If you choose to include income from child support/alimony, copies of court records or cancelled checks showing receipt of payments.
Legible sales contract signed by buyers and sellers (if you have already purchased a home).
Name, address, account number, monthly payment and current balance for:
Installment loans (including student loans, auto loans, mortgage loans).
Revolving charge accounts (home equity, credit cards).
If you are self-employed or paid by commission:
Previous two years’ Federal Income Tax Returns with all schedules.
Year-to-date profit and loss statement and balance sheet.
Corporate tax returns and all schedules.
If you have filed bankruptcy in the last seven years:
A copy of petition and discharge, handwritten explanation of the reason for bankruptcy, evidence of excellent credit since the bankruptcy.
Documentation checklist for home buyer
-Employment Information – Name, locations and telephone numbers of all the employers you have worked for in the past two years. If self-employed, you will probably need to furnish all business records and tax returns for the past three years.
-W2s – Typically you will need W2s for the most recent two years. Other income such as Social Security, pension, alimony/child support, dividends, and self-employment income may also be considered.
-Pay Stubs – Save all your pay stubs, as you may need to furnish these for a thirty-day period before your mortgage application.
-Federal Income Tax Returns – If you are self-employed, or more than 25 percent of your income comes from commission, overtime or bonuses, you may need to provide complete copies of federal income tax returns you filed for the two most recent years.
-Bank Statements – You may need to provide statements from all of your accounts (checking, savings, mutual funds, money markets, certificates of deposits, 401(k) or other retirement accounts) for the last two months to verify the exact amount of cash you have available for your down payment and other costs associated with your home purchase.
-Current Debts – Be prepared to provide balances, account numbers, and the minimum monthly payments for all credit accounts. These include credit cards, loans and alimony and child support you make every month.
Home loan qualification
Lenders look at two things when determining if you are able to qualify for a home loan: your ability to repay the loan and your willingness to repay it.
● Ability to repay – The first thing that a lender wants to know is if you are able to repay the loan for which you are applying. The lender looks at your current employment. Have you been in the same job for at least two years or at least the same line of work for a few years? This shows the lender that you have steady employment, and it’s a great plus in qualifying for a home loan.
The lender also looks at your total income and compares it to your debts, adding in your proposed monthly mortgage payment. You must have sufficient income to comfortably make these payments. This reflects your ability to repay the loan when qualifying for a home loan. If the lender believes your debt load is too high, you will only qualify for a smaller loan and probably at a higher interest rate. Therefore, it makes sense to pay off as much debt as possible before applying for a home loan.
● Willingness to repay – The next step in qualifying for a home loan is determining your willingness to repay the loan. Lenders determine this by looking at how you have paid off debt in the past, and it is one reason why lenders check your credit report. If you have faithfully made on-time payments toward your past debts, it helps you when qualifying for a home loan. The lender also looks at how you intend to use the property that you are buying. If you plan to live there, it is more likely that you will repay the loan.
The lender may ask you for a very complete financial picture of your life: your income, assets, credit report, and so forth when qualifying for a home loan. Once you provide this information and the lender is able to verify it, it shows the lender your ability and willingness to repay the loan. The lender is then able to help you qualify for a home loan.
Getting pre-approved for a mortgage will be a great help in deciding on what kind of house you will be able to afford. When you meet with a lender, they will look over your personal financial situation and assess what amount you can afford in a new home.
Typically, a mortgage payment and all of the costs associated with homeownership (e.g. maintenance, repairs) will be higher than rent. If money is tight now, it will only get tighter. Make sure your budget has room for fixing the air conditioning or painting your house.
When figuring out how much house you can afford, keep in mind that you are the one who will be making the mortgage payment. Do these calculations with your comfort level in mind. Don’t overextend yourself, but choose a home price that has a monthly mortgage payment that you can feel comfortable paying each and every month.
How do I calculate my debt-to-income ratio?
The arithmetic – In order to make the calculation, add up your fixed monthly expenses such as your car payments, minimum credit card payments and any other regular debt obligations such as monthly child support or student loans. Add your expected housing payments and divide the total by your gross monthly income.
A common rule when shopping for a mortgage is that your debt-to-income ratio should be no higher than 36 percent. Anything above this could mean you will be denied credit or charged a higher mortgage interest rate on your loan. Lenders also like the total of your housing expenses alone to not exceed twenty-eight percent of your monthly gross income.
Some lenders will accept loans even if your ratio is above forty percent, and there are certain mortgages that allow a higher percentage as well. Federal Housing Authority mortgages and Veterans Administration mortgages, for example, allow a debt-to-income ratio of up to forty-one percent. With any loan, however, you need to be sure you are comfortable with the amount of debt you are accumulating. Keep in mind, the lower your debt-to-income ratio the better, so pay down as much debt as you can before starting the mortgage process.
Use the following worksheet to calculate your debt-to-income ratio:
Minimum monthly credit card payments*: _____________
+ Monthly car loan payments: _____________
+ Other monthly debt payments: _____________
+ Expected mortgage payments: _____________
= Total: _____________
Your debt-to-income ratio:
Total/monthly gross income = _____________
*Your minimum credit card payment is not your total balance every month. It is your required minimum payment — usually between two and three percent of the outstanding balance.