Updated: 9/29/2010 12:00 AM ET|
Homebuying? Make lenders love you
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 talk of rock-bottom mortgage rates 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.
Liz Pulliam Weston
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 620 cutoff point. 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 can muster a 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.
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
Lenders are moving 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.
When figuring your debt load, lenders typically factor in only the minimum payments on your credit cards and other loans.
If you have credit card debt at all, you're probably not ready to be a homeowner. Credit card debt indicates you're living beyond your means, and buying a home is likely to make that worse. Develop the discipline to pay off your cards, and you'll be in better shape to buy a home.
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She left out a few things:
1) Don't deposit any large odd amounts in your checking or savings accounts 2 to 3 months prior to loan shopping. I know this applies to government-secured loans, at least. By "large", I mean more than a couple hundred dollars. They will ask you what it is and you need to be prepared to come up with proof, like a receipt.
2) If the lender asks you for something, get it to her/him ASAP. Better yet, get them more than they asked for -- so if they asked for 1 month's worth of bank statements, give them 3.
3) Be prepared to be totally scrutinized. Chances are, they will really get up in your business financially, even if you've got an 800+ FICO and 20% or more down.
It's also a good idea not to have too many pending disputes on your credit report -- or so I've heard.
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