If you are thinking about buying a home in the coming months you are likely asking yourself, “Will I qualify for a mortgage? How much will I need down? Is my credit good enough? What else is the bank going to want from me?”
Probably the most unnerving aspect of buying a home is getting pre-approved by a lender for financing. All lenders are different and what one bank considers an unacceptable risk another may consider absolutely perfect. The trick is to find a mortgage professional with multiple sources of financing and arm yourself with information before your application.
What are underwriters looking for when they are reviewing a mortgage application? They want to make sure the borrowers can comfortably afford the monthly payment, have a history of financially responsible behavior and (ideally) have a little skin in the game. i.e. money down.
First, your credit score. There are three main credit reporting depositories: Transunion, Experian and Equifax. They each issue you a score based on their own internal models and your credit history. When you apply for a mortgage we will pull all three (called a tri-merge report) and will use the middle score for the purposes of evaluating your loan.
How credit scores are calculated is proprietory information that only the credit bureaus. Paying all your bills on time is a big part of your score but it is not the only part. Here are other factors considered:
1. Credit Cards – These are a useful tool and when used properly can improve your score dramatically but the same is true if they are used improperly. Availability of credit is a big part of your score, if you never have a balance of more then $300 on a card with a $1000 credit limit and pay your bill on time, this will give you a great credit score. If you maintain a $900 balance and pay your bill on time, this will bring your score down because you have very little available credit.
2. Car Payments/Student Loans/Other Installment Loans – Paying these payments on time will keep your credit score up, if you are more then 30 days late in any given month, your score will drop dramatically.
3. Collections – These bring your score down (even medical collections) and should be prevented in any way possible.
4. Foreclosures/Repossessions/Bankruptcy – These are all major hits to your credit score and would likely disqualify you from qualifying for a mortgage for anywhere between 2 to 7 years.
5. “Time in the Bureau” – Initially a new debt will typically drop your credit score but it will slowly rise back up as you make monthly payments. If you have several trade lines with a year or more of good payment history and no new debt you will likely have a higher score.
The next thing lenders look at is affordability. Ideally the total of all your monthly debt payments, including credit cards, car payments, student loans and housing expense (Mortgage Payment, Monthly Mortgage Insurance (PMI), Homeowners Insurance, Property Taxes, Homeowners association dues calculated on a monthly basis) should not exceed 41% of your gross monthly income. Exceptions (up to 50% or more) can be made for higher ratios if you have an excellent credit score, money in savings, are borrowing a lot less then the home is worth or an exceptionally stable income.
If you are currently a renter you should always pay your rent with a check, not cash. Most lenders require renters to provide 12 months of canceled checks to show that you have a history of paying a house payment in a timely fashion. If you pay rent in cash or rent from a family member you may not qualify or may be required to take a HUD approved Homebuyer’s Education Course. Lenders also look out for “payment shock.” Payment shock is a concern for someone who (as an example) is paying $450/month in rent but applies for a mortgage of $2000/month. Often payment shock with a first-time buyer will require additional scrutiny and often attendance in a Homebuyer Education Course.
The last part of determining affordability is the stability of income. Typically, to qualify for a mortgage you need two years of stable income. If in 2008 you worked as an Engineer for a company and in 2009 you left to go work for the competitor for a higher wage, that’s alright because you have two years of stable income as an Engineer. Now, if you worked as an Engineer in 2008 and then decided to take the summer off and then change careers and become an Insurance Agent in the Fall of 2009, you likely will not qualify.
Homeownership can be very rewarding and right now it can also be a great investment. If your middle credit score is above 640, you have stable income and a little money saved up then you will likely qualify to buy a home. There are many government and conventional programs available that will allow you to finance as much as 100% of the homes value. To learn more about the various programs available visit www.ReliantSanford.com.
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