Mortgage lending today is based on tiered pricing, which means that rates are adjusted based on various criteria. One of the main criteria used is your FICO credit score. Your credit score will help to determine whether you qualify for the loan and what rate you’ll pay on your loan, and there is an inverse relationship. The higher your credit score, the lower your mortgage rate, all other things being equal.
According to myFICO.com, the best mortgage rates are available to borrowers who have credit scores of
760 or above. As your score goes lower, your interest rate goes up. With some exceptions noted below, the lowest score needed to qualify for a mortgage is 620.
Employment and Income Stability
Mortgage lenders prefer candidates that can prove steady employment for at least the past two years. Long periods of unemployment won’t bode well for your application, and neither will a pattern of declining earnings. In a perfect world, you have been on the same job for at least the last two years, or have made a job change to a higher paying position in that time.
Lenders tend to be especially strict when it comes to self-employment income. We will require that you document your business income with income tax returns for the past two years. And they will generally have you execute IRS Form 4506, which will enable them to obtain a transcript of your returns in order
to verify they are the same ones you sent to the IRS.
Debt-to-income ratio – also called DTI – comes in two forms. The back-end ratio measures the total of all of your monthly minimum debt payments, plus your proposed new housing payment, divided by your stable monthly gross income. The front-end ratio focuses just on your housing costs, excluding all other
debts. Historically, banks have wanted to see a front-end ratio of no more than 28% and a back-end
ratio of no more than 36%. Depending on the type of mortgage and other factors, however, these ratios can go higher.
For example, the maximum back-end DTI is 49% for an FHA loan. There may be some flexibility, however, if you meet certain criteria. For example, the mortgage lender may allow you to exceed the limit if you are strong in every other area of your loan application. Further, a lower DTI may result in a lower interest rate.
As a general rule, you’ll need a minimum down payment of 20% of the purchase price of your home in order to get the best mortgage rates. Since mortgages are price adjusted based on risk factors, a loan with 3.5% down is considered higher risk than one with 20% down, and will carry a higher interest rate.
But that isn’t the only reason to save up 20%. When your down payment is less than 20% of the purchase price, you will likely have to pay PMI, or private mortgage insurance.
On a conventional loan with a 5% down payment, mortgage insurance will effectively add .62% to your payment (assuming a credit score of between 720 and 759). On a $200,000 mortgage, this will translate
into an annual premium of $1,240, adding an additional $103.33 to your monthly house payment.
In the mortgage world, cash reserves are measured in terms of the number of months’ worth of house payments you have saved in cash. The reserve includes money saved in checking or savings accounts, money market funds, or certificates of deposit. However, it generally does not include funds in a retirement plan since that money can only be withdrawn after paying taxes and penalties.
The standard requirement for cash reserves on a mortgage is two months – as in you must have enough liquid cash after closing to cover your new mortgage payment (principal, interest, taxes, and insurance) for at least the next 60 days. On higher risk mortgages, the cash reserve requirement may be higher.
Get fully underwritten and approved!
It’s not always necessary to get pre-approved for a mortgage but all smart borrowers do it – and do it before beginning their home search. A pre-approval is the lender’s way of saying they would like to work with you. After you apply for pre-approval, the lender will check your credit and thoroughly examine your financial life. After this, the bank will tell you how much you can borrow. Your pre-approval loan amount is hugely helpful when you are looking for a home. A realtor may insist you get pre-approved before he/she will begin to work with you seriously. If you know the limit on what you can borrow, you won’t waste your time looking at homes that are way beyond your price range. You can look at homes that might be a small stretch though, on the assumption that the seller might take a low offer. Sellers will also be more inclined to seriously consider an offer if they know you are pre-approved. A full approval happens after you have picked out your dream home and submitted it to the bank for its consideration. An Approval will be contingent on an appraisal of the property and an inspection. If both of these come back to the lender’s satisfaction, they will go ahead and finalize your loan specific to that property. Being pre-approved by that lender will usually mean that the final approval process will move much faster, because your own financial documents have already been submitted and scrutinized. So what are the main differences? Being pre-approved doesn’t necessarily mean you will get the final approval. Pre-approval usually lasts for a set amount of time, commonly 60 days. After this point, the bank’s pre-approval will lapse unless you renew it, and you must start the process again. If the appraisal of the property comes back too low, the bank will not approve the loan, even if you are pre-approved. Also, if there is any change in your financial circumstances between pre-approval and approval, the bank may decide not to lend to you. To get pre-approved quickly and easily click on the following link www.markmerry.com/purchase-assistant
Mark Merry your Edina mortgage expert