In today's market, getting a home loan can be a nightmare; frustrating to even the cleanest borrowers. In this ever changing industry, where it's hard for the professionals to keep up, how in the world can the average consumer be prepared?
While the rules change constantly, there will always be a few key factors that reveal a good borrow vs. a poor borrower. Here are 5 steps to making this process as seamless and stressfree as possible:
- ASK YOUR FRIENDS, family members, and co-workers for a recommendation to a great lender.As we head into more of a purchase market and leave the refinance market, there are still a lot of loan originators out there who were simply trained to be order takers. A highly recommended lender will save you a tremendous amount of frustration.Also keep in mind that paid advertising does not always equate to a good lender. Recommendations from people you know, like and trust are worth their weight in gold.
KNOW YOUR FACTS.
- Your credit score will be a first step in determining if you are eligible for a mortgage.Mortgage interest rates and PMI rates area impacted by your credit score. The difference between a 620 credit score and a 720 credit score can effect your monthly payments by hundreds of dollars.
- Excellent credit = 720 and above
- Good credit = 660 to 719
- Fair credit = 620 to 659
- Poor/bad credit = 619 and below
- More sources: MyFICO.com and Zillow's Understanding Mortgage Credit Scores
- Your mortgage lender will pull a full credit report and will be able to go over the details with you.
INCOME Generally, lenders want to see that you have stable income that has either remained level or increased over the past two years.(If you are a recent college graduate, you will not need a full two year history of employment if you were employed within a reasonable time post graduation). You should have ample income to carry the amount of debt a new home will cost you.
- Self-Employment / 1099 Income - this can be the trickiest type of income. You will need to proved 2 complete years of tax returns, both business and personal including all schedules and attachments.
- W2 Income - generally the easiest income to work with. You will still need to provide 2 years of tax returns and W2's.
- Allimony / Child Support - a portion can be used as income if it will continue for at least 3 years. If you pay child support and/or allimony, you will need to list that in your monthly debts.
- Rental Income - 75% of gross rental income may be able to be counted as income. It depends on the loan-to-value ratio of this residence.
ASSETS The safest borrowers have enough liquid cash to put at least 20% down on the home plus closing costs and have 6 months+ of housing cost reserves left over.
- On a minimum level, you should have at least $7,000 available for cash needed to close.
- Can you get a loan with no assets? Absolutely.
- Might you lose out on the home of your dreams because the seller took another offer coming from a buyer with more reserves? Absolutely.
- There are several Downpayment Assistance Programs available and they vary by state. These loans generally take longer to close. In today's market, many sellers have more than one offer. If given the choice, sellers generally select the buyer that appears the strongest.
DEBTS Your minimum monthly payments for all lines of credit
- SAMPLES: car payments, minimum monthly credit card payments, additional mortgages, student loan payments, lines of credit you co-signed for.
- Debt Ratio Requirements - for Conventional loans, your monthly debt including all housing (principle, interest, tax, insurance, pmi, association dues PLUS all your other minimum monthly payments)
- EXAMPLE: Monthly income = $8,000Debts = $2,510New mortgage $1,375 (principle, interest, taxes, insurance, pmi)Car payment $375Visa $35Mastercard $25Son's car payment (co-signer) $225Son's student loan payments (co-signer) $475Debt ratio = 31.375% ($2,510/$8,000) = GOOD
PREPARE YOUR DOCUMENTS
- Most recent paystubs
- Last 2 years tax returns and W2s/1099s/etc.
- Last 60 days of bank statements and investment accounts
- CALL YOUR LENDER Now that you have an idea of where you stand at what is needed, the rest of the process should be easier. Once your lender has reviewed all of your documents, he/she will inform you of your lending options and the costs associated with the options you are interested in. Pick the option you are most comfortable with and your lender will issue you a Pre-Qualification letter that you can take to your Realtor to start viewing potential homes.
- CALL YOUR REALTOR AND BEGIN YOUR HOME SEARCH!
So, in summary - if you have had a good job for at least 2 years, you have ample cash in the bank, you have a good credit history, and your debt ratio is low - this process will be as smooth as it possibly can.
This article does not contain all of the requirements that need to be met to approve a loan, rather it is meant to be a guide to get you started. Always consult with a mortgage professional - each individual case is always slightly different. For more information, contact Alicia Funk, Sr. Mortgage Lender with Talmer Bank & Trust at 586-260-6773 or email@example.com. NMLS#1057024.