Studies have shown that a lot of renters aren’t buying homes simply because they are misinformed or unaware of what it actually takes to get a mortgage. You don’t need a 20 percent down payment or an 800 credit score, but there are some things you do need to be eligible for financing. Here are five things to keep in mind when you decide you want to buy a home.
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Your credit score is a big part of mortgage approval. Lenders use your score to determine how risky of a borrower are. It not only affects your eligibility for home financing but can also determine what interest rate you qualify for.
A minimum credit scoreof 620 is required by all mortgage loans delivered to Fannie Mae, but individual lending establishments may have a higher credit score requirement depending on the loan type and program. Compass Mortgage has the ability to finance certain loan types for qualified borrowers with credit scores as low as 560.
But let’s say you don’t have a long enough credit history. Certain loan types, like USDA, FHAand HomeReady, allow otherwise qualified borrowers to build a credit history from non-traditional sources such as rent, utility payments, cell phone bills, etc.
To complete your loan application, your lender will ask for information regarding employment, finances and the home you wish to purchase. The following documents are used to verify the information you give to your mortgage banker:
- Purchase agreement
- Last two years W-2’s and federal tax returns
- Last 30 days paystubs
- Last two months bank statements for all financial accounts (including investments)
- Loan payment information (car, boat, etc.)
- Earnest money deposit receipt
- Attorney/realtor contact information
- Business tax returns and certified Profit & Loss statements, if self-employed
- Driver’s license and social security card
- Two-year residency history
Not all items listed are applicable to all loan applications. Further documentation may be required for certain loan types and/or borrowers. When preparing for a mortgage pre-approval, it’s a good idea to gather these items so you can get them to your mortgage banker in a timely manner and keep your loan process on schedule.
While you don’t need a 20 percent down payment to buy a home, most loan types require a small percentage upfront. Programs like USDA Rural Development and VA don’t require a down payment, but other small down payment programs include:
Knowing your home financing options is vital to making the most affordable and accessible choice for your financial needs. For more eligibility and benefit information about low down payment loans, click here.
Kind of a no-brainer, huh? But income is a big factor in acquiring a mortgage and determining your home affordability price range. Most lenders recommend that your mortgage payment, including principal, interest, taxes and mortgage insurance (PITI), be less than 28 percent of your gross monthly income.
Lenders will also analyze your debt-to-income ratio, which includes your monthly obligations such as credit card minimum payments, student loans, alimony, child support and car loans, along with PITI. Lenders look at this to ideally be at or below 36 percent of your gross monthly income.
Funds for Closing
Getting a mortgage requires a lot of third parties working toward your purchase finalization, which come up as charges known as closing costs. Typically, closing costs range from 2-5 percent of your home’s purchase price, though there are ways to minimize closing costs. These charges include, title search, title insurance, appraisal fees, attorney fees, home inspections, escrow deposits, etc.
If saving for closing costs on top of a down payment is a homebuying hurdle, talk to your mortgage banker about the possibility of a lender credit. Sometimes, if a borrower doesn’t have enough cash for closing, a lender can grant a credit to cover all or some of their closing costs.
The borrower is still paying for the closing costs (eventually), just not upfront. When a lender agrees to credit closing costs, it is usually at the price of a slightly higher interest rate so the costs will be paid back by the borrower over the life of the loan.
Overall, your best bet for making sure you have all of your financial bases covered prior to buying a home is meeting with a mortgage banker for a pre-approval or loan commitment. They’ll advise you on any areas you need to improve, like credit score, or how much you need to be saving for a down payment.
For more information about what it takes to buy your first home, download our free Mortgage 101 Handbook.