Unless you’re sitting on a ton of cash, you’re going to need a mortgage to buy a home. Unfortunately, you can’t just show up at a bank with a checkbook and a smile and get approved for a home loan. You need to qualify for a mortgage, which requires some careful planning. So, how do you please the lending gods? it starts with arming yourself with the right knowledge about the home loan application process.
What is a Good Credit Score?
This powerful three-digit number is a key factor in whether you get approved for a mortgage. When you apply for a loan, lenders will check your score to assess whether you’re a low- or high-risk borrower. The higher your score, the better you look on paper and the better your odds of landing a great loan. if you have a low credit score, though, you may have difficulty getting a mortgage.
So, what is considered a good credit score in the mortgage realm? While a number of credit scores exist, the most widely used credit score is the FICO score. A perfect score is 850. However, generally a score of 760 or higher is considered excellent, meaning it will help you qualify for the best interest rate and loan terms.
A good credit score is 700 to 759; a fair score is 650 to 699. If you have multiple blemishes on your credit history, your score could fall below 650, in which case you’ll likely get turned down for a conventional home loan and will need to mend your credit in order to get approved. Unless you qualify for a Federal Housing Administration loan, which requires only a minimum of 580.
Before meeting with a mortgage lender it’s a good idea to get your credit report. You are entitled to a free copy of your full report at AnnualCreditReport.com. Though the report does not include your score (for that, you’ll have to pay a small fee) just perusing your report will give you a ballpark idea of how you’re doing by laying out any problems such as late or missing payments.
What Down Payment You Need
What’s an acceptable down payment on a house? In a recent NerdWallet study, 44% of respondents said they believe you need to put 20% or more down to buy a home. So if you do the math, you’d have to plunk down $50,000 on a $250,000 house. Of course, that’s a big chunk of change for many home buyers.
The good news? That 20% figure is common, but it’s not set in stone. It’s the gold standard because when you put 20% down, you won’t have to pay mortgage insurance, which can add several hundred dollars a month to your house payments. Another advantage of putting down 20% upfront is that it’s often the magic number you need to get a more favorable interest rate.
However, if you’re unable to make the 20% down payment, there are many lenders that will allow you to put down less cash. Plus, there are a number of loan products that you might qualify for that require less money down. FHA loans require as little as 3.5% down. The U.S. Department of Veterans Affairs loan program gives active and retired military personnel the opportunity to purchase a home with a $0 down payment and no mortgage insurance premium. Same with USDA loans.
Another option worth pursuing is qualifying for down payment assistance. There are 2,290 programs across the country that offer financial assistance, kicking in an average of $17,766 according to one study.
There are some cases, though, where you will have to put more that 20% down to qualify for a mortgage. A jumbo loan is a mortgage that’s above the limits for government-sponsored loans. In most parts of the country, that means over $417,000; in areas where the cost of living is extremely high, the threshold jumps to $625,000. Since larger loans require the lender to take on more risk, jumbo loans typically require home buyers to make a bigger down payment – up to 30% for some lenders.
What is your DTI Ratio?
To get approved for a mortgage, you need a solid debt-to-income ratio. This DTI figure compares your outstanding debts (on student loans, credit cards, car loans, and more) with your income.
Lenders like this number to be low, because evidence from studies of mortgage loans shows that borrowers with a higher DTI ratio are more likely to run into trouble making monthly payments, according to Consumer Financial Protection Bureau.
For a conventional loan, most mortgage lenders require a borrower’s DTI to be no more than 36%. Some lenders will accept 43%.
The good news? If you’re above the 36% ceiling, there are ways that you can lower your DTI. The easiest would be to apply for a smaller mortgage. Meaning you’ll have to lower your price range. Or if you are not willing to budge on price, you can lower your DTI by paying off a large chunk of your debts in a lump sum.
