After the housing market crisis a few years ago, mortgage qualifications became much stricter, seemingly overnight. As the economy recovers and interest rates remain low, mortgage banks are adjusting their qualifications once again. Here’s an overview of what it might take for you to get qualified for a mortgage in today’s market.
Personal credit history is still the gold standard used to evaluate a consumer’s ability to handle debt. Before you consider applying for a mortgage, request a free copy of your credit report and review it closely. If anything appears to be incorrectly reported, get in touch with the credit reporting agency and file a dispute. Many banks have minimum thresholds of FICO scores for qualified mortgages, so you’ll want to ensure that your credit report accurately reflects your debt profile. To get the best rates, you’ll want to fall in the well-qualified category, with an even higher FICO Score — Home Buying Institute recommends somewhere around 740 or higher.
Low debt-to-income ratio
A recent ruling issued by the Consumer Financial Protection Bureau requires lenders to evaluate mortgage applicants’ debt-to-income ratio. In most cases, this ratio must be less than 43 percent. This qualification helps ensure that lenders don’t approve loans that a consumer will have difficulty repaying. You can easily calculate your own debt-to-income ratio on a monthly basis to determine if you meet this guideline. Divide the sum of your monthly loan payments plus your expected housing payment by your monthly income. Use your pretax income (or gross monthly income) as reported on your pay stubs, not the net amount of your paycheck.
A down payment
The days of zero down payments on mortgage loans are long gone. While you may not need as large of a down payment as you would have in the past few years when mortgage qualifications were stricter, you will still need to put some money down on your home. An FHA loan requires as little as 3.5 percent down, which may help you buy faster. However, lower-down-payment loans also may require FHA or private mortgage insurance, charge additional points or fees and are assessed at a higher interest rate. Running the numbers through a mortgage calculator using different down-payment scenarios will illustrate the difference in your overall interest as well as your monthly payment, which may be enough incentive to keep saving before buying.
Mortgage qualifications have eased since the government and lenders reacted strongly to the dip in the housing market several years ago. If you’ve been waiting for the right time to buy, now is a great opportunity to capitalize on low rates and test the waters of the real estate market.
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