The days of getting a mortgage with little or no down payment and no income verification are long gone. Today borrowers have to demonstrate to lenders they are good credit risks. While there is wide variability in what lenders require, it basically gets down to three factors: credit, cash and income. If you have enough of each, you should be able to swing a conventional mortgage, which is is any mortgage that the Federal government does not guarantee. Because the government is not stepping up to insure the loan, mortgage lenders need assurance that you are a good credit risk.
Items you will need
- Personal income tax returns for past two years
- Documentation of all your income sources, including your job and investment income
- Your credit report and score
- Appraisal of the home you wish to buy, done by an appraiser chosen by your lender
Review your credit report and credit score before applying for a conventional loan. If your credit report shows a consistent pattern of late payments and that you are maxed out on credit cards and other lines of credit, chances are you will not be approved. You might want to wait a year or two before applying for a conventional mortgage so you can establish yourself as more creditworthy. Taking action to reduce your debt and making payments on time and in full will also raise your credit score, a measure of your creditworthiness. Generally, any score below 620 will cause your application to be denied.
Determine if you have enough cash to secure the loan. Conventional loans require the home buyer to invest at least 5 to 20 percent of the sales price in cash for the down payment and closing costs. A higher down payment usually results in a lower interest rate. Conventional loan programs also usually require the borrower to have at least three months' cash reserves at closing to cover monthly living expenses, including the mortgage payment, in the event of an emergency.
Prove you can live within your income. The lender will carefully examine your income and monthly expenses. Generally, your monthly housing cost of mortgage principal and interest, property taxes, and insurance should not exceed 28 percent of your income. You must have enough income to pay both your housing costs and your additional monthly debt such as credit cards and other loans. This amount cannot exceed 36 percent of your monthly income. In certain circumstances these percents can be exceeded, especially if you make a higher down payment.
Apply to several lenders and select the best rate and terms. If you pass the credit, cash and income guidelines, chances are you will qualify for the loan. Comparison shopping helps ensure you will get the best interest rate and terms possible for your new home. Your lender will choose an appraiser who will put a value on the home you wish to purchase. The amount of money a lender is willing to lend is based on the appraised value of the property.
- Make sure you can afford the monthly payment, even if your lender has approved you for the loan.
- If you cannot meet the mortgage guidelines, you might consider waiting until you pay down enough debt or secure additional income before applying for a mortgage. Another solution is to buy a less expensive home.
- Make sure your lender explains all terms in your mortgage in plain language.
- Pay your mortgage on time and in full each month. Late payment fees can add up fast. Even a few late payments per year can mean hundreds of dollars in late fees.
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