Things to know before applying for a mortgage
The majority of home buyers will need a mortgage when buying a home. Applying for a mortgage, unfortunately, is much more work than simply showing up at the bank with a checkbook in hand. Getting approved for a mortgage takes knowledge, planning, and organization. The following are three things potential buyers should know before applying for a mortgage.
What is considered a good credit score?
The elusive credit score is often misunderstood, yet is a major determining factor in being approved for a mortgage. This three-digit number helps lenders assess whether or not borrowers are high- or low- risk. The higher the credit score, the better chance a borrower has of being approved – and at a better interest rate.
What is a good credit score? While a perfect score is 850, few borrowers have scores this high. An “excellent” credit score is 760 or higher; a credit score this high means a borrower is likely to qualify for the best terms and interest rates. A “good” credit score is between 700 and 759, while a “fair” score is between 650 and 699.
Consumers are eligible to check their own credit reports. This can ensure there are no problems such as late payments or overdue bills that need to be addressed. It’s recommended to first check your credit at least six months before applying for a mortgage; this gives borrowers the chance to fix or amend any issues their credit reports may have.
What amount should be put down?
What is the right amount to put down on a house? Unfortunately, there is no simple answer; the right down payment amount varies from buyer to buyer and depends on a variety of factors.
In a recent study by NerdWallet, 44% of respondents said they believe that a down payment of at least 20% (or more) is required to buy a home. While common, this amount is not set in stone. The reason a 20% down payment is considered the “gold standard” is because this is the amount that no longer requires PMI, or private mortgage insurance. Another advantage is putting this amount down is that it can help reduce monthly payments or even receive a better interest rate.
Can’t afford 20% down? There are many lenders that still allow borrowers to make smaller down payments. FHA loans, for example, only require 3.5% down; loans by the Department of Veterans Affairs give military personnel the opportunity to purchase a home with $0 down and no PMI. USDA loans also have lower down payment requirements than traditional mortgages.
What is a DTI ratio?
DTI, or debt-to-income, is the ratio of debts to income. For example, a couple who makes $6,000 per month and pays $500 towards outstanding loans has a DTI of 8.3%. After factoring in a mortgage payment of $1,000 per month, the couple’s DTI would increase to 25%.
Lenders use DTI as evidence as to whether or not a borrower will be able to afford a monthly mortgage payment. Most lenders look for potential borrowers to have a DTI no more than 36%, while some will accept up to 43%. High DTI? Try to lower it before applying for a mortgage by paying down existing debt as much as possible.
by Author, December. 010, 2019