Updated: 8/24/2011 4:16 PM ET|
How to impress a mortgage lender
With post-crisis credit still tight, you'll need to work harder to demonstrate you can handle a mortgage. Jump through these 5 hoops to prove you're worthy.
You might be tempted by low interest rates and a weakened housing market to buy your first home this year or to move up from your current house.
But getting a mortgage is tougher than it was just a few years ago. Lenders are pickier about all facets of the process, including:
- Your credit scores.
- The size of your down payment.
- Your income and how steady it is.
- Your other debts.
- The value of the property versus how much you want to borrow.
Here's how to get into the best possible shape to land a mortgage today:
1. Burnish those credit scores
Mortgage lenders typically pull FICO credit scores from each of the three major credit bureaus (Equifax, Experian and TransUnion) and use the middle score to help determine your rate and terms. If you're a couple, a set of scores will be pulled for each of you, and the lower of the two middle scores is typically used.
These days, you need a 740 middle FICO score to get the best deals. If you fall much below that, you'll pay more.
Someone in the 700-720 range, for example, might get an interest rate that's a quarter-point to half a point higher than someone with better scores, says Cameron Findlay, the chief economist for mortgage quote site LendingTree.
The costs climb as your score sinks, and many lenders these days have a cutoff point around 600. Below that, they won't even consider you, so you might have to shop for a lender that will.
The Federal Housing Administration's minimum score is 580 if you want to put down the minimum 3.5% down payment. Below that, you'll need 10% down.
The fastest ways to boost your scores are to correct any serious errors in your credit reports (AnnualCreditReport.com is where you get your free look) and pay down your credit card debt. For more, read "Raise your credit score to 740."
2. Be a worker bee
The days of "liar's loans" are gone. Now lenders want proof of steady income. Ideally, you've been working at the same job for two years or more and have the W-2 forms to prove it. Lenders want to see two years' worth of tax forms, as well as your most recent pay stubs.
Any other income with a two-year history, such as investment income, alimony or disability payments, can be counted when lenders determine how big a mortgage you qualify for.
If you're self-employed, prepare to jump through more hoops. You're likely to be asked for more documentation of your income, including business tax returns, a profit-and-loss statement, copies of your business license and even a letter from your accountant.
What if your work history is spottier? Say you lost a job in the recession and had to take one at a lower salary. That doesn't knock you out of the running for a mortgage, but the amount you can borrow will be based on your new, lower pay.
3. Keep your debts low
Most lenders have moved back to old-school ratios, whereby your mortgage wasn't supposed to exceed 28% of your gross monthly income and your other debts no more than 8%, for a total debt-to-income ratio of 36%.
You can get a mortgage with higher debt loads, but you might pay a higher interest rate. If your debt-to-income ratio exceeds 45%, you'll typically need high credit scores and lots of cash in the bank to persuade a lender to go along. Above 50%, you might be out of luck.
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LJayP- We bought the "Three Credit Scores" for my husband and myself. We were so happy they were above that now...So what I have learned is that the credit scores we buy are a total ripoff. I am angry!!!! How can they tell you one thing and the lender another??????
As a lender we are equally disappointed to see this, but we do see it all the time. The problems is that the services you use to purchase your score make money off of giving you a score not off of giving you the correct score for your situation. The score they generate for you is a consumer debt score, think of what a department store would look at before giving you a credit account. This scoring model is much different than what you might find if you were being rated for your risk as a mortgage applicant. That is why the scores vary so much. I just wish they would tell you that. Hang in there and find a good mortgage lender who has experience in helping people rebuild credit or works with a vendor who does this and you will own a house. I know it stinks but you can do it. If you want I have more information on credit and how lenders look at it on my blog at UofHome.org.
Most FHA loans are looking for a credit score of 640 now. It first went up to 620 this year and now it is 640. We just went to the lender on Friday. We bought the "Three Credit Scores" for my husband and myself. We were so happy they were above that now. We had a bankruptcy two years ago. We pulled our credit at the lender, our scores were off. Way off on one number. It was the high one so that was good but it was off 105 points. It had been the lower number. Then the other two numbers were below 640 now. Now we have to do some things and wait a month. So what I have learned is that the credit scores we buy are a total ripoff. I am angry!!!! How can they tell you one thing and the lender another??????
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