How to get the best possible mortgage for your home buying. This is a tight and tougher market for obtaining a mortgage. Many potential home buyers are asking this question - and also how to obtain a good mortgage if they want to refinance.
If a borrower applies for an adjustable rate mortgage the banks and lenders use fully indexed interest rates and may decline them if the borrower cannot afford that fully indexed monthly payment. So, while the first year or first several years may be lower payments - they qualification is based on the higher payment of when the interest on the loan adjusts.
First-time buyers are quite often looking for a loan financing one hundred percent of what the property sells for. When this occurs, there is PMI (Private Mortgage Insurance) which is costly - or possibly a second mortgage loan at a higher rate than the first loan. The cost for this Private Mortgage Insurance is based upon the credit score (FICO score). When the borrower's credit score is lower - their financing options are fewer and quite often will have a higher interest rate on their loan. If their FICO score is below (say 620) the chances for obtaining a loan for 100% of the purchase price is probably not going to happen.
Many lenders prefer a buyer to come-into the transaction with some sort of down payment. The lenders look more favorably on the buyer(s) in this case - however, they also look for the borrower to have additional funds available to cover at least two months of principal, interest, taxes and insurance in reserve. Another ‘key' for a borrower is to pay-off as much debt as possible - doing this before applying for a mortgage is important - with the highest priority being improving their credit score. To sum it up, the two top considerations looked at by lenders are the borrower's credit score and the borrower's down payment. I've seen where people with everything going for them have gone out and purchased a new car or boat prior to their mortgage loan being approved - sometimes, this causes the bank/lender to reject the loan - the borrower's overall debt amount is important. The standard debt-to-income ratio used by lenders is 28-36. Using that guideline, your monthly mortgage payment can't exceed 28 percent of your monthly household income, and your total debt payments should not surpass 36 percent.
If a borrower has an excellent credit score, say in the 760 - 850 range, their average rate on a 30-year fixed-rate mortgage is typically 1.5 percentage points lower for a borrower with a credit those higher scores. One item to always keep tabs-on is your credit report. I suggest one gets a copy of their credit report prior to applying for a mortgage. There are 3 major credit reporting agencies - Experian, Equifax and Trans Union.
Happy House Hunting!