If you are like most first time buyers, you probably have apprehension and fear about the process. Getting into the home and making the payment isn’t as much of a consideration as applying and getting a mortgage. You may have heard horror stories from buyers spending weeks getting items together only to be turned away at the 11th hour. As much as things have changed in the mortgage industry, much has stayed the same. There are still a handful of items that can make or break your approval. The biggest difference from the past is that today you can’t just be strong in one or two of these, you need to be strong in all of them. Here are four key items needed for loan approval.
Credit Score.Gone are the days of low credit score loans getting approved. Your credit doesn’t need to be perfect, but it can’t be terrible either. Generally speaking most lenders have a minimum score of 580 needed for approval. A 580 score is well below average and often carries at least a few late payments. The lower the credit score the higher the down payment. With a say 595 score you will need at least 20% of the purchase price as a down payment. On the flip side a 727 score may allow you to put down just 3%. It is important to note that the score you see from your credit cards or other credit services may not be the same score used by a lender. The only way to get your exact score is to apply with a local lender or mortgage broker.
Down Payment.The second biggest factor for approval is down payment. In recent years there has been a sprinkling of new loan products hitting the market. Most of these products are aimed at first time buyers with a smaller down payment. In the past FHA was the only low-down payment product, but today there are more options than ever before. With as little as 3% of the purchase price you may be able to get approved for a loan. Keep in mind that there are also seller & lender credits that can help offset the down payment and closing costs. This may come at a slightly increased rate or purchase price, but they will help offset the money needed at closing.
Debt to Income.It is not enough to enjoy a good salary and assume income is not a factor. You can make hundreds of thousands of dollars, but if you have corresponding debt you may have trouble getting approved. Lenders look at something called your debt to income ratio. They take the minimum monthly payments on your credit cards, car payments and new mortgage and divide that by your monthly income. This number must fall below lender standards, generally 50%, to get approved. If this number is too high you won’t get approved regardless of credit score or down payment.
Lenders want to see that you can comfortably repay their loan. They look to see that you have stable income for at least two years. You don’t have to be at the same company for that time, but you must be in the same line of work or have accelerating income. This is also the case for self-employment. Most lenders will not allow a business owner to be on the application without two years of tax returns. They will take some consideration for students at their first job, but two years is generally the standard.
If you haven’t applied for a loan in a few years, there are many more options available today that may work for you. As long as you are solid in these four areas, you should be able to find a loan that works for you.