Are you eligible for the mortgage you want?
By Jan Lindsey
One hundred and twenty-five percent mortgages are gone. So are 100 percent mortgages – done in by the economic collapse that was, in part, blamed on foreclosures on all the unconventional mortgage loans made during the boom years. What are left behind are conventional, FHA and VA loans and more stringent requirements for home borrowing. The mortgage market hasn’t seen controls like this since the 1980s.
Requirements “have tightened substantially,” says Jim Pair, president of the National Association of Mortgage Brokers and owner of brokerage Mortgage Associates of Corpus Christi. Now that law and order has returned to the Wild West, it might be useful to know how the rules have changed. After all, home prices have dropped making a purchase more alluring.
Credit scores
If you are interested in buying a home now, your credit score is the biggest factor affecting your ability to get a mortgage and the terms it will carry, Pair says. It is next to impossible to get a mortgage these days if your credit score is below 680, Pair says. “Of course, the higher credit score you have, the better off you are going to be as far as interest rates are concerned,” he says. People who have lost a home to foreclosure are not eligible to obtain a mortgage because of the amount of damage a foreclosure does to a credit score.
With a 680 credit score, your only option will be a federally guaranteed FHA loan, he said. FHA loans once went only to those who had little down payments or weak credit histories and so they carried some stigma in the 1970s and ’80s. That is no longer the case, Pair said. “It is more accessible now than it was.” “Congress has expanded their (FHA) insurance program so they can insure more loans,” Pair says. And a lot more people are taking them because they require smaller down payments – a minimum of 3.5% as opposed to the minimum 5 percent required by a conventional mortgage, he said.
FHA loans have one drawback: they carry a monthly fee that is charged for the life of the loan. Conventional mortgages, on the other hand, will require mortgage insurance if your down payment is less than 20 percent of the purchase price of the home. That mortgage insurance payment stops when you pay off enough of the principle to reduce the amount owed to 80 percent of the value of the home. Mortgage insurance companies pay the lender a portion of the value of the home in the event of a foreclosure. They have taken a beating from all the recent spate of foreclosures. Now, Pair says, they will not issue a policy to anyone with a credit score of less than 720. So if your credit score is 715, you will have no choice but to come up with a 20 percent down payment if you want a conventional mortgage.
To get your credit score, visit https://www.annualcreditreport.com, a website sponsored by the three credit reporting agencies: Equifax, Experian and TransUnion. You are entitled by law to one free credit report each year from each agency. The credit report is free, but if you want the reporting agencies to crunch the numbers and supply a generic credit score there is a small fee. The mortgage lender may generate and different score by weighting elements of your credit report differently, but a credit score from the reporting agencies will help you estimate where you are.
Debt to income ratio
The percentage of your monthly gross income that you spend on debt payments is called your debt-to-income ratio. If your debt to income ration is more than 41 percent, you will not be able to take out a mortgage, Pair says. To compute your ratio, you need to know two things: the total amount you pay each month on debt (count the minimum, leaving out any extra you may be paying to pay something off) and your monthly income. Be sure to add reasonable estimates for the principle, interest, mortgage insurance, taxes, insurance and any homeowner association fees you will be expected to pay on your new home to your debt payments.
To calculate your gross monthly income, take your annual wage and divide by 12. This will give you a different number than you would get if you multiplied your weekly wage by four because some months are longer than others. To find your income to debt ratio, multiply your debt dollars by 100 and divide the results by your income. If your income is $4,000 per month and your debt load is $1,000, your income to debt ratio is 25 percent.
The process
The amount of paperwork required to obtain a mortgage has increased beyond what it was in the 1980s – and way beyond what it was during the boom, when no-income-verification loans and the like were offered, Pair says.
Even if you are salaried, you will have to show tax returns for the last two years, he said. “We no longer can just rely on a W2 (tax form) and a pay stub like we did in the past.” If you are using gift money as a down payment, the person who gave it to you now must do more than verify that it is a gift that will not have to be paid back. The donor must release his financial information to the lender to prove he has the means to give you the money.
Perhaps as a result, it now takes 45 to 60 days for a loan to be approved. Pair says. For decades, it took only about 30 days.