While the housing market has certainly recovered from the 2009 crash, banks aren’t as lend-happy as they were a decade ago. While this is actually a good thing, it also means that you may have to do a bit more work or have a better financial history than if you bought ten years ago.
I know how confusing it can be – buying a house – so I put together some quick tips on how to qualify for the best mortgage possible. And keep in mind: just because you may have issues with one of these points doesn’t necessarily mean you won’t qualify for a mortgage. The best thing to do is definitely consult with a lender like Lending Tree to see what they can do for you.
Getting a mortgage with a credit score under 620 has become pretty much impossible. Before the crash of ’09, there were companies that specialized in mortgages for folks with sub-prime scores. That is no longer the case, except in some cases where banks may approve FHA or VA loans at as low as 600.
Keep in mind, though, that even if you are approved for a mortgage, it doesn’t mean you will get the best rate. In order to accomplish this, you must have a score of at least 760. DoughRoller created this handy-dandy graphic, which shows you how much your rate can change depending on your credit score. It also calculates a monthly principal and interest payment, based on a $300,000 loan.
As you can see, it pays big bucks to increase your score. In order to accomplish this, you need to monitor your score closely, and to do that I highly recommend Credit Sesame. It is totally free (seriously, you’ll never have to enter your credit card info) and a reliable way to keep on top of your credit score. Check it out!
Down-payment is another way you can decrease your interest rate. The ideal amount is 20%; anything less than that will increase your rate as the loan is considered higher risk. I recommend getting a Capital One 360 checking or savings account and consistently squirreling away money each month for your down payment. You can also better monitor your budget and accounts, including investments, by using the free program Personal Capital.
Another biggie that will affect what kind of mortgage rate you will receive is debt-to-income ratio. Depending on how the lender calculates it, generally you can’t have more than 28-36% of your income go to debt (including your future mortgage). That’s why I advocate paying off large credit card bills and other loans, if possible, before buying a house.
Banks also like to see how much cash/savings you have in your accounts. The more money you have, the less of a risk you are to them. This translates to a lower mortgage rate. While not the most important thing lenders look at, it is still a good idea to have a nice emergency fund as well as savings for future household repairs.
Again, all that really matters to a lender is how risky of a client you would be to them. The last thing they want to have to deal with is a foreclosure. So if you haven’t had a stable job for very long, or if your income fluctuates due to self-employment, these may be things that would make a lender raise your rate or even reject your application.
I hope these simple tips help you to qualify for the best mortgage possible. Be sure to check out part one, How to Know When You are Ready to Buy a Home, before taking your next step to home ownership.