You may have heard that it’s tough to get a mortgage right now or that banks simply aren’t lending. While that may have been true during the recession, the situation has changed over the last few years.
The reality is that if you have a reasonable income and credit score, you can get approved for a home loan. Before you meet with your local mortgage lender, it pays to understand what you’ll be asked and what documentation you’ll need to provide. Getting pre-approved for a mortgage is the first step you should take in your home buying process so you know your price range before you start looking for your new home.
As you begin the process of securing a mortgage, spend some time analyzing different scenarios with an online mortgage calculator. These tools ask for variables like your state and city, the loan amount you’re seeking, your approximate credit score, the type of loan you’re interested in and how much of a down payment you can afford.
Lenders will want to know your debt-to-income (DTI) ratio. This is simply a matter of finding the percentage of your income that is dedicated to servicing your debt. All your monthly debt payments – car payments, student loans, credit cards and medical payments (but not things like cable TV, cellphone and utilities) – are divided by your monthly income. If your monthly income is $5,000 and your total debt payments are $1,000, your DTI is 20 percent.
Your lender will look at your credit reports to see how you’ve managed your payment obligations in the past. This is generally considered a good indicator of whether you’ll make your payments in the future, and a big part of whether a bank will want to offer you a loan.
In addition, your credit score plays a key role in the interest rate and other terms you’ll be offered. A credit score of 850 is considered perfect, and a score of 740 and above is generally considered to be very good. The higher your score, the better chance that you’ll be offered a lower interest rate. Scores in the 600s likely will still get you qualified for a mortgage, but you may pay slightly higher rates.
The amount of money you can put down on your home also will play a role in the type of loan for which you qualify. Speak with your lender to find out which type of loan is best for your situation. Conventional loans usually require that you put down 3 to 20 percent, depending on individual lender requirements. For a $150,000 home you’ll need to have at least $4,500 in savings for your down payment.