In spite of what you might think, banks are desperate to make loans right now. But that doesn’t mean that lending standards aren’t tight; it’s still going to take a lot of paperwork to make the lenders happy.
Rates are the lowest they’ve ever been, so while it might be a bit of a hassle to jump through all the hoops, the time has never been better for that jumping. With rates well under 5% and 4% for 30-year fixed-rate loans, now is the time to act.
Fannie Mae, Freddie Mac and the FHA are still the major players in the mortgage business. Although different lenders have different requirements, the following details are generally what they’re looking for in today’s economic climate.
Meet these requirements and you should be able to find the loan you’re seeking:
1. Credit score. If you’re buying your primary home or refinancing your primary home, a minimum credit score of 620 is required if you have at least 20% equity in the property. If you have less than 20% equity, the required credit score is 640-660, depending on the Private Mortgage Insurance applicable. These values are for Fannie Mae and Freddie Mac and do change.
* For FHA loans, the minimum credit score is 580 with a down payment of 3.5%. The actual lenders may impose higher credit requirements than this, however. Most bank require 640 FICO, some 620. FHA permits 580 for maximum financing.
2. Down payment. A down payment of 3%, 5% to 10% is required on a conforming loan for your primary residence. A conforming loan is currently set at anything less than $417,000. Down payments on jumbo loans (> $417,000) are want to be at least 10%.
* Having a down payment of 20% will allow you to avoid PMI (private mortgage insurance); this can save 0.5% – 1.5% per year.
3. Debt, Debt Ratios. Lenders like to be sure that your income can support all of your debt. The primary way they do this is to look at your debt to income ratio. They’ll look at the total housing expenses, including mortgage payment, taxes, home insurance, private mortgage insurance, and any association fees.
* This total is divided by your monthly gross (pre-tax) income. The general rule is to be at less than 28%. When all other debt is included, the total should be less than 36%. In rare instances, lenders may allow up to 45% or more.
* This is a very easy calculation you can do at home before you ever apply for a loan. Do what you can to minimize your debt before you apply for a mortgage.
4. Proof. Documentation. Lenders will want to see, at a minimum, your last two paycheck stubs and W-2 forms for the last two years. They will also want to see account statements for any bank, retirement, and investment accounts.
* If more than 25% of your pay is in the form of commissions or bonuses or you’re self-employed, they will want to see 2 years of tax returns. Your income will be averaged over those 2 years for any calculations.
* If you want to purchase a house but keep your current residence and rent it out, you’ll need to provide a signed 12-month lease, and only 75% of that income can be claimed when applying for the new mortgage. You also must have at least 30% equity in your current home.
Getting a mortgage isn’t especially easy right now because of the regulations, but banks really do want to loan money. That’s largely how they make money after all. If you conform to all the items above, you won’t have any problems qualifying for a loan.
Even if you don’t meet all the requirements, you might be surprised what they can do for you. It never hurts to ask – or to shop around for a good mortgage loan officer (hint! homeloanblog.com).
Many people are surprised when they qualify for a mortgage; maybe that can be you, too!