You've found your dream house, but unless you have a few hundred thousand dollars laying around, you need financing. A number of different mortgage programs are available to suit different needs, but the most basic is a conventional mortgage. When you find a lender that has a good rate and reasonable fees, make the application. If you meet its criteria, you won't have a problem getting the loan.
Bad credit can disqualify you from a conventional home loan almost immediately. At application, you sign an authorization for the lender to obtain your credit report. Typically, your credit will need to be no lower than 620. Beyond just the score, the underwriter will analyze your payment history to look for trends of delinquency or slow payments. These are the two biggest ways your credit can affect conventional home loan approval, but the underwriter will also look at public records, inquiries and the ratio of balances to credit limits. A lender may overlook minor blemishes, especially if they're far in the rear view mirror.
You will provide proof of your income with your application. The lender will calculate the ratio of your housing expenses to your income. This includes the proposed mortgage payment, taxes and homeowners insurance. Essentially, this is your total mortgage payment on a conventional loan with principal, interest and escrow. Per conventional mortgage underwriting guidelines, your housing expenses should not exceed 28 percent of your total income. That figure does not take into account the rest of your monthly debt; it will be very difficult to get approved if the ratio is higher than 28 percent.
It would be nice if your mortgage payment were your only debt, but often that isn't the case. While your housing expenses should not exceed 28 percent of your income, your overall debt should not exceed 36 percent. Debt considered for the ratio includes credit cards, personal loans, student loans, lines of credit and auto loan payments. Some lenders will go up to 40 percent, but you need good credit, typically over 700, and a large down payment to qualify.
Nonconventional mortgage options allow for little to no down payment. A conventional mortgage requires at least 5 percent. Typical lenders want to see 5 percent to 10 percent down, with many requiring as much as 20 percent. Even if you get a conventional mortgage with less than 20 percent down, you will have to pay private mortgage insurance, PMI for short. The PMI premium becomes part of your monthly mortgage payment. When applying for a conventional mortgage, you must provide either bank statements proving you have the down payment funds available or a letter from a third party stating that he is giving you the money for the down payment without obligating you to repay it.
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