4 Things You Need to Know When Qualifying For a Mortgage
Unfortunately, many so-called experts have led the public to believe that qualifying for a mortgage in today’s environment is extremely difficult. In reality, although the documentation for mortgages is as extensive as ever, qualifying for a mortgage isn’t really any more difficult than in past years.
During the housing boom of the early 2000’s, many firms rolled out all kinds of creative financing options for prospective homebuyers. Stated income loans, sub-prime loans, etc. were just a few ways homebuyers could finance with minimal paperwork or qualifications. These niche products played a role in the mortgage meltdown and as a result, are no longer available in the marketplace.
Debt –to-Income Ratio’s
Today’s environment consists of a much more standard product offering with qualifying guidelines that are still fairly lenient. Currently, your new housing payment-- plus your monthly installment and revolving debt can go as high as 45-50% of your gross income and you could still qualify to purchase. Coming soon, the government will enact a part of the “Dodd-Frank” bill that will cap a “Qualified” mortgage at 43% of one’s gross monthly income.
Credit scores for mortgage purposes range anywhere from 640 up to 800+. The “body” of your credit is just as important as the actual scores and by no means does it have to be “perfect.” FHA loans are much more forgiving when it comes to credit requirements than are conventional loans and only require a 3.5% down payment. One of the main factors that lenders like to see is for your credit to be clean for at least 1 year.
Basic, Hourly or Salaried employees incomes are usable, assuming there are no large gaps in employment. For 1099 or self-employed applicants, most of the time there is a 2 year history of tax returns required in order to get qualified. In certain situations, a self-employed applicant can get qualified with just 1 year on the job. Be careful with bonus income, car allowances, overtime, etc. as all of these have specific guidelines relating to their usability.
FHA loans require a 3.5% down payment and also allow “gift” money from relatives for the down payment. Conventional loans require a minimum of 5% down all of which must be your own funds. Applicants may borrow against assets, cash out investments and use liquid funds for the down payment. Once you reach the 20% down level, mortgage insurance (PMI) is no longer a factor on the loan.
To summarize, qualifying to purchase in today’s mortgage market is not that difficult although it has become a much more tedious process with respect to documentation. So, don’t be skeptical of the process, just come prepared!
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