Landing a mortgage in today’s tight credit market can be as tough as trying to find a job in today’s economy.
That’s no joke.
One in five homebuyers said waiting to hear if they were approved for a mortgage was more stressful than waiting to hear if they got a job, according to a MortgageMatch.com survey earlier this year.
While you aren’t guaranteed a home loan any more than you are guaranteed a job, you can improve your chances — and ease the pain — if you understand four basic principles lenders follow when you apply for a home loan.
Credit Score
Your credit score, is a numerical rendition of your credit report. It summarizes your credit history and helps predict how likely you will repay a loan and make payments when they are due.
Lenders use credit scores when deciding whether to grant you a mortgage, what terms you are offered, and the rate you will pay on a loan. The higher your credit score, the more likely you’ll get approved for credit and the more likely you’ll get the best rate and terms.
The often used FICO score, for example, ranges from 350 to 800 and while you could be eligible for some loans with a score as low as 580, a score of 620 or above puts you in the running for better rates and terms.
For example, FICO says with a credit score of 620 to 639, the rate on a $300,000, 30-year loan would be about 5.85 percent, and cost you 1,770 a month, as of July 13, 2011. A score of 760 to 850 for the same loan would cost only 4.26 percent with a $1,478 monthly mortgage — the difference of almost $300 a month.
To keep your credit score high the general rules of thumb are: pay your bills on time, pay down high balances, keep balances low on outstanding credit accounts and don’t open new credit accounts you don’t need to increase your available credit.
Down Payment
Federal Housing Administration loans are available for as little as 3.5 percent down, but the more you can put down, the nearer you can get to 20 percent down, the more you can create an effect similar to raising your credit score.
Larger down payments give you a greater chance of landing a home loan and getting the best rate and terms.
Putting money on the table indicates you are willing to share the risk with today’s risk-adverse lenders. Bring to the deal a larger initial stake in the home and the lender knows you will be less likely to walk away from the home should you get into a tight financial spot.
The down payment shouldn’t be a hastily gathered slush fund, but “seasoned” money, an amount you extract from existing savings, investments, assets and other wealth acquired over time as a planned goal.
After you put money down to buy a home, lenders also want to see that you have both the income and cash after the home purchase to pay property taxes, insurance, maintenance and other periodic expenses that come with a home purchase.
Loan-to-Value (LTV) Ratio
The down payment initially determines your loan-to-value ratio. If you put 20 percent down, your loan to value ratio will be 80 percent. If you put only 10 percent down, your loan-to-value is only 90 percent.
Lenders prefer to write mortgages was as low a loan-to-value ratio as possible, because if you default, the bank has a greater chance to sell the home for enough to recoup the loss.
If you don’t put 20 percent down, you may have an option of a second mortgage to reach the desired 80 percent loan-to-value ratio or you’ll likely have to pay mortgage insurance premiums to protect the lender should you default.
Debt-to-Income (DTI) Ratio
The lender needs to be certain you can afford the mortgage payments and imposes debt-to-income ratios to gauge your ability to do so.
There are two ratios to consider, the numbers are not hard and fast, but they offer general guidelines.
The lender wants to see your “front-end” DTI at about 28 percent. It is your proposed monthly housing expenses (principal, interest, property taxes and homeowner’s insurance) divided by your gross monthly income.
However, the “back-end” DTI better reflects what you can truly afford because it includes your monthly housing expense, plus all other debts, divided by your gross income.
You should also toss in your utility, phone, cable, Internet bills and any other recurring bills or expenses to give yourself the best picture of what you can afford.
About Broderick Perkins
Broderick Perkins parlayed 30 years of old-school journalism into a digital real estate news service offering "News that really hits home!" His Silicon Valley bootstrap, DeadlineNews Groupincludes DeadlineNews.Com and the Deadline Newsroom.
That’s no joke.
One in five homebuyers said waiting to hear if they were approved for a mortgage was more stressful than waiting to hear if they got a job, according to a MortgageMatch.com survey earlier this year.
While you aren’t guaranteed a home loan any more than you are guaranteed a job, you can improve your chances — and ease the pain — if you understand four basic principles lenders follow when you apply for a home loan.
Credit Score
Your credit score, is a numerical rendition of your credit report. It summarizes your credit history and helps predict how likely you will repay a loan and make payments when they are due.
Lenders use credit scores when deciding whether to grant you a mortgage, what terms you are offered, and the rate you will pay on a loan. The higher your credit score, the more likely you’ll get approved for credit and the more likely you’ll get the best rate and terms.
The often used FICO score, for example, ranges from 350 to 800 and while you could be eligible for some loans with a score as low as 580, a score of 620 or above puts you in the running for better rates and terms.
For example, FICO says with a credit score of 620 to 639, the rate on a $300,000, 30-year loan would be about 5.85 percent, and cost you 1,770 a month, as of July 13, 2011. A score of 760 to 850 for the same loan would cost only 4.26 percent with a $1,478 monthly mortgage — the difference of almost $300 a month.
To keep your credit score high the general rules of thumb are: pay your bills on time, pay down high balances, keep balances low on outstanding credit accounts and don’t open new credit accounts you don’t need to increase your available credit.
Down Payment
Federal Housing Administration loans are available for as little as 3.5 percent down, but the more you can put down, the nearer you can get to 20 percent down, the more you can create an effect similar to raising your credit score.
Larger down payments give you a greater chance of landing a home loan and getting the best rate and terms.
Putting money on the table indicates you are willing to share the risk with today’s risk-adverse lenders. Bring to the deal a larger initial stake in the home and the lender knows you will be less likely to walk away from the home should you get into a tight financial spot.
The down payment shouldn’t be a hastily gathered slush fund, but “seasoned” money, an amount you extract from existing savings, investments, assets and other wealth acquired over time as a planned goal.
After you put money down to buy a home, lenders also want to see that you have both the income and cash after the home purchase to pay property taxes, insurance, maintenance and other periodic expenses that come with a home purchase.
Loan-to-Value (LTV) Ratio
The down payment initially determines your loan-to-value ratio. If you put 20 percent down, your loan to value ratio will be 80 percent. If you put only 10 percent down, your loan-to-value is only 90 percent.
Lenders prefer to write mortgages was as low a loan-to-value ratio as possible, because if you default, the bank has a greater chance to sell the home for enough to recoup the loss.
If you don’t put 20 percent down, you may have an option of a second mortgage to reach the desired 80 percent loan-to-value ratio or you’ll likely have to pay mortgage insurance premiums to protect the lender should you default.
Debt-to-Income (DTI) Ratio
The lender needs to be certain you can afford the mortgage payments and imposes debt-to-income ratios to gauge your ability to do so.
There are two ratios to consider, the numbers are not hard and fast, but they offer general guidelines.
The lender wants to see your “front-end” DTI at about 28 percent. It is your proposed monthly housing expenses (principal, interest, property taxes and homeowner’s insurance) divided by your gross monthly income.
However, the “back-end” DTI better reflects what you can truly afford because it includes your monthly housing expense, plus all other debts, divided by your gross income.
You should also toss in your utility, phone, cable, Internet bills and any other recurring bills or expenses to give yourself the best picture of what you can afford.
About Broderick Perkins
Broderick Perkins parlayed 30 years of old-school journalism into a digital real estate news service offering "News that really hits home!" His Silicon Valley bootstrap, DeadlineNews Groupincludes DeadlineNews.Com and the Deadline Newsroom.
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