There are four things mortgage lenders look at when deciding whether to grant you financing, and having a balance of each will score you better terms and make the process go smoother. Take a look.
1. Steady Income
A consistent income that is poised to continue into the future is what lenders crave. If you had a gap in your employment in the last two years, for example, that is something that will have to be explained and documented. Lenders want assurance that the loan they are making is going to perform well into the future, so having a stable income is critical. This means if you’re self-employed your income will be averaged over the last two years. It also means pay stubs and a verification of employment will be required if you are a W-2 employee.
2. Good Credit Scores
Additionally, your credit score typically needs to be at least 720 or better. (Not sure where you stand? You can view two of your credit scores, updated every 14 days, for free on Credit.com.) That does not mean if your credit score is less than 720 that you can’t get a mortgage, but it does mean that your credit is going to be looked at a little bit more closely (a 580 score is the minimum needed these days). Perhaps you are utilizing a high percentage of your credit and your credit score is slightly lower due to credit card balances. Or maybe you missed a payment here and there in the past. Whatever the circumstances, know that anything 700 or above is considered to be good in terms of qualifying for financing.
3. Low Levels of Debt
In terms of debt, you want your minimum payment liabilities to be very low in relationship to your monthly income — a target range is 10% or lower of your gross income. A mortgage payment can be a rather large portion of your income. By keeping your minimum payment obligations to 10% or lower, there should be enough room to fit in a mortgage payment. How much money you can borrow is a function of how that payment fits into your income with your other monthly liabilities.
The ideal mortgage candidate will have a 720 credit score, 20% down and a healthy debt-to-income ratio at at least 36%. They will also have a good payment history and solid income. Know this: The more cash down you have, the lower your monthly mortgage payments.
What follows is a snapshot of what mortgage loan program may be suitable for you based on these characteristics. (Note: Each scenario is based on a 30-year fixed-rate mortgage.)
Great credit score, say, of 720 or above, a small amount of cash for a down payment, high monthly payments, say, greater than 10% of your monthly income: Federal Housing Administration 30-year fixed rate.
Great credit score of 720 or above, a small amount of cash for a down payment, really low monthly payments, e.g., 10% or below of your monthly income: Conventional loan 30-year fixed rate.
Credit score of 700, a large down payment, 20% plus closing costs, minimum payments on liabilities worth over 10% of your monthly income: Conventional 30-year fixed rate.
Credit score of 620, a small down payment, payments below or above 10% of your monthly income: FHA 30-year fixed rate.
While there are other programs available in the marketplace, these illustrations will give you an idea of what you might be looking at while balancing your credit, debt, income and asset picture.
You may want to consider changing any of the following:
• Income — Higher or Lower
• Credit score — Higher or Lower
• Assets — Higher or Lower
• Debts — Higher or Lower
Any time you raise your credit, income or assets, that’s a good thing that will help you borrow more, and afford more. Debt is the only one of the four items where the target is to go lower by responsibly paying off obligations.