(Newswire.net — June 5, 2020) —
2020 has been a turbulent year so far, and amidst all the news you may have heard that mortgage rates are at an all time low. According to industry experts, the interest rate for a 30 year fixed rate mortgage – the type of loan most commonly chosen by borrowers – is at an all time low. Housing Wire reported the average rate at the end of May is at a record low of 3.15%, making this an ideal time to obtain a mortgage. Not sure how to qualify? Here are some tips to help you get approved.
Mortgage loan applications are evaluated on three primary factors; credit, income, and collateral.
Credit
The minimum FICO score needed to qualify is typically 580 – 620, and will vary slightly on the type of loan you are applying for. If your credit is on the lower end of the FICO spectrum, an FHA loan will generally accept 580, and even scores as low as 500 can get approved with a 10% down payment. Conventional mortgage loans are those through Fannie Mae and Freddie Mac and will need credit scores between 620 and 680 to qualify. Not sure where you stand in terms of credit score? There’s never been an easier time to find out; all three bureaus are offering free weekly credit reports through sources such as AnnualCreditReport.com for the remainder of 2020. Reviewing your credit report for inaccuracies and challenging them can boost your score significantly.
Income
The second criteria for loan approval is income, but it’s more than how much money you earn…it’s also how much you spend. During the loan application process, you will need to provide details about how much income you’re bringing in and how much money is being spent. In this evaluation, called debt-to-income ratio (DTI), the lender will compare the two and come up with a percentage. 40% or less is the sweet spot in 2020. To figure out your own debt-to-income ratio, add up the total of your monthly bills – you can exclude things like cell phones, cable, or gym memberships; lenders are only interested in items reporting on credit, like car notes and credit cards. Once you have a monthly figure, divide that by your monthly income. If your DTI comes up over 40%, look for any bills that could be paid off to bring down your monthly expenses. Pro Tip: If you have an auto loan that will be paid off in the next ten months, you don’t have to include that in your expenses.
Collateral
The third and final item that factors in the loan approval process is collateral. Collateral means the house you are financing under the mortgage. Whether you’re a first time home-buyer, looking to upgrade to a larger home, or simply want to refinance your current mortgage, you will most likely need to obtain an appraisal. The appraiser will come out and evaluate your home in terms of quality and construction, and will research similar homes in the same neighborhood to determine a value. This is, essentially, what an uninterested third party professional thinks your home is worth. The lenders want to know they’re not going to finance a $300,000 loan on a house that’s valued at $120,000. They need to know they can expect to recoup their losses if the borrower defaults. In a purchase of a new home, these practices also ensure the borrower isn’t getting taken advantage of.
Knowing where you stand ahead of time can make all the difference between a confident experience in applying for a home loan, or a nerve-wracking one. Gather your documents – you’ll typically need two consecutive months of bank statements, and 30 days of pay-stubs. Armed with that and your new knowledge of lending guidelines, you can be sure you’ll be hearing, “Approved”!