Purchasing a home can be one of the most exciting and financially rewarding investments you make in your lifetime. Although the mortgage process may seem confusing, it does not have to be. Being approved for a mortgage often comes down to three things: Credit, Cash and Income.
A credit score is a number that represents how likely you are to repay debt. Your credit score determines if you qualify for a loan, and sometimes your interest rate and how much you are able to borrow. All mortgage loan programs have credit score requirements. For example, in some cases, borrowers applying for a FHA loan can have a credit score as low as 580, and with a Conventional loan, as low as 620.
If you are looking to improve your credit score, work to pay down your credit card balances and make all your payments on time, and do not apply for or open any new credit, or close out existing accounts.
Do not let credit concerns stop you from learning about your options. Review your credit report in detail with a mortgage loan officer. You can receive a free copy of your credit report at annualcreditreport. com.
No, you do not have to put 20% down to finance your new home, but you will need cash at settlement to cover the closing costs and your down payment.
Closing costs can run between 3% and 5% of your home’s sales price. Closing costs often include an appraisal fee, attorney fees, title insurance, taxes, transfer taxes and fees the mortgage company charges to originate your loan. These fees are, in part, dependent on the state and county you settle in and the mortgage company you work with.
The cash you will need for your down payment will depend on the loan program you choose, and typically runs between 3% and 20% of your home’s sales price. Going with the lowest down payment may not always be in your best interest. The down payment amount can affect your interest rate and determine whether or not private mortgage insurance (PMI) is needed on your loan. In most cases, PMI is needed for any loan that accounts for more than 80% of the home’s sales price. However, there are options to avoid PMI even if you put less than 20% down.
If you are VA eligible (current or former military service person), or USDA eligible (purchasing in a rural development area), you could have access to 100% mortgage financing. In either case, there is no down payment required though closing costs will be required.
Your down payment can come from several sources including your personal savings (e.g., checking, savings, investment, retirement accounts, etc.), gifts from close relatives, sale proceeds (e.g., from your car, boat, previous home, etc.), employer bonus, or down payment assistance and grants from government or local non-profit agency programs. You do have to prove where the down payment comes from, so money saved at home or that cannot be traced to its source is unacceptable.
Lenders calculate your debt-to-income ratio, which is based on your income and monthly debts, to measure your ability to manage your existing bills and potential new mortgage. All loan programs have debt-to-income ratio limits. Lenders generally require a work history of at least 2 years. This work history can come from multiple employers and for individuals just entering the work force, time spent in school, in training or in work required certification programs, may count as well. For self-employed, commissioned, part time or seasonal workers, you have to have been in your current position for at least the last 2 years, and your qualifying income is the average earned over the last 2 years.
Once you have determined you have the credit, cash, and income to afford a mortgage, it’s time to get pre-qualified so you know how much house you qualify for… and start your home search!
Being pre-qualified for a mortgage means a lender has reviewed your credit along with your income and asset documents, and provides you with a pre-qualification letter. Realtors and home sellers will expect you to be pre-qualified.
Be sure to speak to a knowledgeable mortgage loan officer so you can review all potential options and find the one that works best for you and your family. Best of Luck!!