How to Get a Mortgage...

So you want to buy a home. Well congratulations! That’s a big; & can be an intimidating step. If you are not fortunate to be able to pay cash it can also be an expensive investment. One that you will need to get a loan for. There are many bank, credit unions & lending institutions out there that offer many different kind of products to fund your home loan. So many that I can’t go into them all here. Not to mention the requirements for these loans change all the time. However I can help demystify the process a bit by identifying some tried & true things every lender looks for. If you’re ready to buy take note & get your items ready & in tip top shape. If you’re on the fence now is the time to start getting your items together.

Your credit score. Yep, they look at that for everyone you will be adding to your loan. So be it just you or you & another person or many people they will look at everyone’s score. Lenders have been known to accept credit scores as low as 500, but these are hard to find. If you can find them they will require a down payment (no free mortgage here). Obviously the higher the score the better your chances of getting not only the loan but a good interest rate & terms. So be sure to check those scores & do what you can to bump them up. Here’s a bonus tip: once you start shopping for a lender (and you can look at more than one) complete all your applications in a short period of time to cut back on the amount of hard inquires on your credit score. Second bonus tip: Oh and don’t apply for credit for something else like say a new credit card or a new vehicle. All this will impact your score & lenders don’t always just pull at the beginning but again before closing.

Debt to income ratios. Ok this one is as important as your score. This is the amount you make & what you are spending. Lenders like to see a 20/30 ratio, however they may go higher or lower on either end depending on the loan & the lender. If you stick near these numbers you will be safe however. So what is 20/30, there are lots of online calculators but I’m going to tell you how to do it now (feel free to skip over this & use an online calculator if you are more comfortable with just plugging numbers). Add up the gross monthly income from all sources & everyone on the loan. Then add up all your expected mortgage, tax, insurance & hoa fees for the month & divide them by this number. For example: Mortgage $1,200 + taxes $100 + $100 insurance + $100 hoa fees = $1,500. Then divide this by your gross monthly income from before. For this example we’ll say its $6,000 and your top number is 25%. To get the bottom number we’re adding all your debt (well the stuff that shows on that handy credit report) so credit cards (unless you pay them in full every month), loans of any kind (unless they’ll be paid in full in 10 months or less). So for our example you have a car payment $300, student loan $150, minimum credit card payment of $50.00. Add these numbers to the above housing fees of $1,500 and your payments total $2,000. Then divide this by your income again and you get 33.33%. So in this example the ratio is 25/33. A little higher than the 20/30 but pretty close & will likely put you on the path to getting a good mortgage.

Employment. Yes, they want to see what you make so you’ll need pay stubs & tax returns. Pay stubs for the last 6 months or less, tax returns are normally two years. For employment they prefer if you with your current employer for the last two years, but if you have changed jobs they would prefer that you are in the same field &/or have made the move for more money. So be prepared if you have changed jobs recently as they may ask. Self-employed? They’ll want to see bank statements as well as tax returns, showing what you are making on average. Again they’ll be looking for normally the last 6 months.

Cash for closing. I know you’re asking them for money but not all loans will cover everything. Remember you have to have money for closing costs. Items like taxes, points, transfer fees, notary fees, wire fees, loan origination fees, the list goes on & on. As a buyer I would recommend you add 4-6% onto your loan amount for these. Some banks will allow the seller to assist in closing costs see our blog post

for more information. There are some banks out there who will allow you to finance all your costs into the loan & pay nothing at settlement. These were common before the epic housing bust. They are harder to find now, but if you can then good for you.

Cash for Down payments. Expect most banks to ask you to pay anywhere from 1% - 20% of the loan upfront in addition to those fun closing costs. Again this varies on the lender & type of loan, but save up some money now. There are companies out there that can give you money to help with closing & down payment assistance if you take some financial classes. Look at your local city & state programs. Some loans will also allow for gift money from relatives to help you get that down payment together but again amounts they are allowed to provide will vary on the type of loan. In keeping up with the down payment if you have less than 20% and the lender is ok proceeding be forewarned that they will make it up in the form of private mortgage insurance. Which is an amount of money tacked on monthly to your loan. Let’s say you put 0% down but the lender says ok we’ll do it but for the next 5 years or so you have to pay an extra $200/month on your mortgage. Obviously the more cash you have available to you the better off you are with all the money end of things.

Reserves. Are you seeing a pattern? Cash is king, even when you are looking to borrow money. Banks also want to see what you have saved. Not just for closing cost & down payment but they want to make sure that in the event you have a medical emergency or lose your job you can pay your mortgage, taxes & insurance for at least 60 days. These reserves can be in 401K, savings, or other forms of liquid cash. Again not all lenders/loans require these but be prepared to show this if need be.

There you have it the top 6 things lenders are looking for when issuing you a loan. Depending on the loan & the lender there may be some give in what they allow but I like to think it’s better to be as prepared as possible. Can you get loans without perfect credit, being self-employed or a high debt to income? Certainly there are lenders out there & programs available. However the more information you have ready to go & the better your numbers look the better your rates, terms & options. So if your numbers a lacking now is the time to start repairing them. If your numbers look good then go for it! Until next time everyone.