Although there's still a lot of uncertainty in the housing market, the drop in home prices has made home ownership very alluring. However, you may think you don't qualify for a mortgage. It might not be as bad as you think.
This May Be The Time To Get Into The Housing Market
This past spring home prices in major cities are at the same levels as the summer of 2003; additionally, in recent months in many metropolitan areas home values haven't been dropping as rapidly as from 2008 through 2010. Could this be the signal that home prices are stabilizing? Only time will tell.
On top of that, the average 30-year fixed rate morgage is 4.5%, which is a four-decade low. All these aspects makes home ownership very enticing to those who don't own a home, or for those that do and want to buy investment properties.
The Five Ingredients To Mortgage Approval
The weighting of the following factors varies with the lender. It would be reasonable to assume equal weight so you'll be positioned adequately.
- Dowm payment: despite what you may be hearing since the beginning of the recession, you don't need 20% down. A significant portion of morgages have down payments of 5% to 10%; if you qualify for a Federal Housing Authoriy (FHA) loan you only need to put 3.5% down. However, if your down payment is less than 20%, you'll need mortgage insurance which can cost 1% of the loan value at closing and 1.1% of the loan value annually which is added to your monthly payment. This can be cancelled as soon as your loan to value ratio drops below 80%.
- Job history: this is analyzed carefully, as lenders don't want to be lending money to someone who can't pay. Lenders do however, read the newspapers and they are aware of the horrible job market, so they look at your entire job history. You'll need support for as far back as possible.
- Paperwork: the lender will need full documentation of anything and everything financial. They want to see 401(k) accounts, savings accounts, any assets you can give them, plus pay stubs from your current job.
- Debt load: of course, you can't be overextended because that could force your house payment to be in jeopardy. The lender will look at your credit card balances, your student loans and car loans. The like total debt payments, including your house payment to be less than 40% of your gross income. This could be offset by sizable assets and if you show the lender you've been working to reduce your debt.
- Credit score: this is a number between 300 and 850, the higher the better. Most mortgage lenders are looking for 640 or better. Don't fear; an estimated 35% of borrowers fall below this level; if you show stellar performance in one of the other areas, or if your score is due to a medical expense that was beyond your control, that may make up for a low credit score.
I'm Still Worried About Getting Approved
Don't be. As stated, if you have poor marks in one area, you may be able to impress the lender in another area. If you get turned down, they'll tell you why. That would be the area to start working on to get your finances in shape.
Have you had your eye on home ownership?