This is truly a buyer’s market. The current market correction is bringing the dream of home ownership back into reach for many Americans.
Educated consumers can avoid the mortgage pitfalls and take advantage of the bargain prices. There are some core key facts that will help you get the best mortgage.
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First, pull our own credit report and work on improving your credit score. Approximately 25% of the US population has errors on their credit reports. Make sure you pay off any open collections or apply to the credit bureau to remove any erroneous information before you try and apply for a home loan. If your credit score is below 725, consider paying down some of your credit cards and doing some off-cycle additional payments. Both of these will help raise your credit score. If you can, try to pay down your credit cards to less than 50% of their limit. Have that credit report as clear as can be before your first mortgage application.
More and more financial institutions are returning to the basics of responsible lending. The days of the 100% financing are essentially gone, except under extraordinary circumstance. Most banks will require something on the order of a 20% down-payment, maintaining an 80% Loan to Value (LTV) ratio. One of the best ways to set aside that type of money is to assume mortgage shock before you have a mortgage.
Mortgage shock is the difference between your rent and your future mortgage. If you currently pay $600 per month for your apartment and you are considering the purchase of a $150,000 house, your PTI (payment, tax, insurance) would be about $1,200. Start actively saving that amount monthly while you are house hunting so that you can adjust your lifestyle to fit your new house payment. That money will help you with down payment, inspections, and closing costs.
In order to qualify for any lower a down-payment, you will need to explore several different options to see which one works the best for you. In some instances, if you are willing to purchase Private Mortgage Insurance, some lenders will still allow a 3% down payment. Similar 3.5% down-payment programs are still offered through the Federal Housing Assistance Loans, Veteran’s Administration Loans, and USDA Loans in rural areas.
One program to consider is the FHA 203K loan. Many foreclosed properties have significant deferred maintenance issues. The FHA 203K allows the projected project costs to be rolled into the overall loan. There are some detailed additional requirements, but it is a tool to achieve your dream home on a tight initial budget.
Another aspect of obtaining a mortgage is being credit-worthy. You achieve this by maintaining the best credit score possible and properly documenting your income sources. A standard mortgage is usually available to people with a credit score of 725 or better. If your score is greater than 620 but less than 725, you will have to attempt to get a subprime mortgage. Given the market conditions, a subprime mortgage may be difficult to come by, but they are still out there if you have steady income and you pick a property that is well within your mean.
Even with less than perfect credit, there are steps you can take to improve your chances of getting a loan. Know what you can qualify for by obtaining a prequalification, ensuring you are shopping in the right price range. Make sure that your payment would be less than 40% of your gross income, and that the payment is clearly feasible given your current income level.
For lower income and moderate income families, USDA loan programs may offer one of the last available 100% financing options. Qualifying incomes vary by state and county, but the USDA offers both direct loans and guarantees on qualified loans.
Beyond traditional sources, you may find sellers out there willing to offer seller financing or liberal rent-to-own options. Either may be to your advantage if traditional financing sources fail you.
Provided you have a steady income, a reasonable down payment, and a credit score over 620, there is a favorable loan option out there for you. If your credit score is below 620, it is still worth starting a relationship with a lender and that professional may be able to help coach you on FICO improvement so that you can attain your dream of home ownership. Consult your local bank or mortgage originator to pre-qualify and start your house hunt today.