Before You Apply for a Mortgage: What You Should Know When Shopping for Credit
In light of recent econmic conditions and the unstable financial markets, banks and mortgage lenders have tightened their qualifications for lending money for mortgage loans. Within the last 12 months, the federal government has mandated sweeping changes in the way borrowers can qualify for residential home loans.
What is Your Home WorthOne of the most striking changes is in the relationship between lenders and appraisers. Long gone are the days when you could pick up the phone and call the appraiser down the street to perform an appraisal to develop a value on a piece of property. The “Home Valuation Code” now forbids the lender to have any contact with the appraiser. The appraisal is ordered randomly through a national company that deals exclusively in assigning appraisers to jobs. This has presented quite a problem in the lending industry as appraisals have been assigned to appraisers outside their normal lending area. An appraiser unfamiliar with the area works at a disadvantage with respect to values, amenities, school districts and recreational areas. This may cause a value to be disporportionately high or low.
Know Your Credit ScoreThe single most important factor in being approved for a mortgage is your credit score. Borrower’s qualify for the best rate with a credit score of 740 or higher. If your score is under 640, you will have a hard time trying to find a no credit check payday lender that will grant you credit.
Everyone is entitled to one free credit report every 12 months, so take a look at your report. Lenders put most emphasis on your payment record for prior mortgages and housing payments and student or government loans. If you have claimed bankruptcy in the past; you must be discharged from the bankruptcy for at least two years and more importantly re-establish credit.; at least 3 tradelines with an excellent payment record are required.
Income and Down Payment RequirementsFor a non-government insured loan you must make a down payment of at least 5% of the sale price. Your entire payment which includes principal, interest, taxes, homeowners insurance and private mortgage insurance, if you put less than 5% down, generally cannot exceed 30% of your gross monthly income.. That same payment plus any revolving debt such as charge cards, or term loan debt such as auto payments cannot exceed 40% with a 5% down payment; or about 43% with more of a down payment.
These guidelines are substantially stricter than in previous years.
Sub-Prime LendingSub-prime lending is generally non-existent. Sub-prime mortgages were designed for borrowers with less than perfect credit and these borrowers were charged a higher interest rate or a variable rate that increased over time. When property values began to decline and rates began to escalate these borrowers could not pay their mortgages. Properties were foreclosed on, but the properties were no longer worth the amount of the outstanding loans; therefore the lenders had to take the hit. The federal government was complacent in this as they twisted the arms of banks to lend to people that could not afford to own a home. This was a part of the “Community Re-investment Act” that mandated lenders to lend in low income areas. In light of the recent housing crisis in the United States, most, if not all lenders are steering away from sub-prime lending.
The best way to insure that your mortgage will be approved is to be diligent in paying your obligations, use a limited amount of revolving credit and only borrow within your means. This results in a high credit score.
You must be in the same line of work for at least 2 years with a good probability of continued employment.
The more of a down payment you have, the more favorably your application will be looked upon. Make sure you have at least 3 months of payments in the bank in reserves after closing.Mortgage lenders and brokers are still lending, so if you have the right qualifications, now is a great time to get a good deal. Interest rates are still low and there are lots of properties on the market. So happy house hunting and good luck!