Five factors play key roles in mortgage application
NEW YORK — There’s rarely been a better time to buy a home. If only you could get approved for a mortgage.
Despite the persistent uncertainty in the housing market, a steep drop in prices has made ownership a more attractive option for many. Yet some potential buyers may be sitting on the sidelines assuming they won’t qualify for a loan in today’s stricter lending environment. It turns out the reality isn’t as stark as many believe.
“There’s no doubt things have tightened up, but it’s not as tight as everyone thinks,” said Michael D’Alonzo, president of the National Association of Mortgage Brokers. “We had a 10-year run of insanity. So the standards were in need of some tightening.”
It’s true that lenders are looking more closely at an applicant’s financial status. But that doesn’t mean banks are only giving mortgages to those with sparkling credit histories and impressive assets.
Meanwhile, the reasons to jump into the market are compelling. This spring, home prices in major cities were at the same levels reported in the summer of 2003. And the average interest rate for a 30-year fixed-rate mortgage is 4.5 percent, which remains near a four-decade low.
If you’re unsure about whether you’d be approved for a mortgage, here’s a look at five factors that will be considered in your application:
1. The down payment
Don’t rule yourself out just because you don’t have a lot saved.
“The myth that people need 20 percent is exactly that, a myth,” said Frank Codel, head of Wells Fargo’s national consumer lending.
Codel said a significant portion of Wells Fargo mortgages are for down payments of 5 percent to 10 percent. Borrowers can also apply for loans from the Federal Housing Authority, which only require a 3.5 down payment.
The catch is that mortgage insurance is required when down payments are less than 20 percent. The exact cost varies. But with FHA loans, an upfront fee of 1 percent of the loan is tacked on to the mortgage. A 1.1 percent fee is also added on to the monthly payment.
So on a $200,000 loan, the upfront fee would be $2,000 and the monthly fee would be $183. Mortgage insurance on conventional loans can be far cheaper, but will vary depending on your credit score. The insurance can be canceled once you reach 20 percent equity in your home.
2. Job history
The down payment is important, but banks are more concerned about whether borrowers will be able to keep up with mortgage payments. That means job histories are vetted carefully.
“We’re looking at not only the ability to buy a home, but their ability to stay in the home,” said Sanjiv Das, CEO of CitiMortgage. “That seems like a basic requirement. But it wasn’t always the case in the past.”
A recent period of unemployment won’t automatically disqualify you; lenders are aware that the job market hasn’t been kind.
But banks will want to see that you’re currently working and that there’s strong reason to believe you’ll be able to pull in a steady paycheck in the future.
That means they’ll want to know your full job history, including whether you’ve changed careers.
3. Debt load
Lenders want to know that you’re earning enough to handle all of your bills, not just your mortgage payments.
“We want to make sure people are not overextended,” Das said. “In the past, you had people who bought boats and cars and had more debt than they could handle.”
So all of your debts, including credit card balances and student loans, will be weighed against your total household income.
The exact formula for what’s an acceptable level varies. But at Citi, an applicant’s total household debt generally can’t be more than 41 percent of their income. That’s including the projected mortgage payments. Other lenders may allow for more wiggle room, but the debt-to-income ratio won’t be far above 45 percent in most cases.
Sizable assets, whether it’s in a savings, investment or retirement account, could also offset any of an applicant’s shortcomings in income or heavier debt loads.
4. Credit score
Borrowers generally need a credit score of at least 640 to qualify for a conventional mortgage in today’s market, according to D’Alonzo of the National Association of Mortgage Brokers. FICO scores range from 300 to 850.
But keep in mind that 640 isn’t an unreasonably high bar; more than two thirds of borrowers are at or above that level, according to FICO, which develops the most widely used scores.
The exact FICO score cutoff will vary depending on the lender. But those who have lower scores may still be eligible for an FHA loan. Lenders may also be willing to overlook an unimpressive score if other aspects of an application look strong.
If your credit score took a hit because of medical bills or some other emergency, be prepared to explain that to the loan officer. It could help take the sting off a low score.
It can also work in your favor if you’ve been paying down debt and working to lift your score over the past year or two. That will demonstrate that you’re serious about correcting past mistakes.
Also keep in mind that your credit score helps determine the interest rate on your mortgage. So if your score just barely qualifies you for a mortgage, it may be worth raising it before you apply.
One of the biggest differences in the application process today is that lenders want documentation to verify your financial status. That’s in stark contrast to the days of the housing bubble, when lenders issued mortgages that required little to no paperwork.
Now, lenders will want recent pay stubs and information to verify other aspects of your applications, such as savings and retirement accounts. The bank’s underwriting department may also reach out to you to clarify any discrepancies or gaps.
Still, the process can be seamless if all your ducks are in a row. If there are no major snafus, the approval process can take as little as 30 to 45 days.
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