Financing Your New Home
Think you can't get a home loan? Think again. You may be pleasantly surprised
October, 2008.
By Phyllis Byrne Nelson, Coldwell Banker Home Loans mortgage advisor.
Well you finally found the home you love and the media is saying that no one is lending money. That is not true. You can still get mortgages for new homes or refinancing but the requirements are stricter than a year ago.
Let’s look at a few things you should be aware of when you apply for a mortgage. The easiest way to think of it is CIA; credit, income and assets. Credit requirements have gotten stricter over the past year. Today if you want to get a good rate, your credit score should be above 720. You can still get mortgages with scores in the mid and high 500s but your best rate will be for credit scores above 720. If you have a good score and don’t understand why it isn’t higher, after all you have never been late on anything; look at your credit cards. Your balance should never be more than 50% of the credit limit on any card. If it is, pay it down, ask the lender to increase your credit limit or spread your balances around to get your balances under 50%. The best is to have balances around 30%. This has almost the same weight as paying on time and is the one thing most people miss.
For income, lenders want to see two years of uninterrupted employment. It can be different companies as long as it is continuous. Almost all loans today require documentation, e.g. two years of W-2s, tax returns and the current month’s pay stub. If you have your own business they will view the taxable income on your tax return as your income. Income is gross income, before taxes and deductions, and includes but is not limited to, base salary, bonuses, overtime, commission, alimony, child support, pensions, social security and interest on investments. For areas other than base income you need two year’s history to have it considered or documents showing it will be continued into the future.
Okay so now you know what you need to support your income, but how much of a mortgage can you qualify for with your income? Many things go into qualifying for a mortgage. If you want a quick, back of the envelope, calculation of the amount you’ll qualify for, multiply your gross income by 3.5. When the loan officer reviews your other monthly expenses this may go up or down but at least it’ll get you started. Ask the loan officer what your monthly payment will look like. Regardless of what you qualify for, you want to be comfortable with your monthly payment and you still want to afford your lifestyle. Add the down payment amount to the number you are comfortable with and you have a starting sales price for your new home.
The next area you need to consider is assets. Most lenders will ask you for two months of bank statements, all pages, to substantiate your assets. If it is an investment account, you’ll only need last quarter’s statement. If you have any large deposits, other than income, you will be asked to explain it. Be prepared to source the funds deposited into your accounts. Obviously you’ll have to show that you have the money needed for your down payment. Today you can put as little down as 3% of the sales price with an FHA loan. Anything less than 20% will require you to pay mortgage insurance. You will also need closing costs. Speak to your loan officer about including the closing costs in your mortgage if you do not have the money needed to close. This is called a seller’s concession. Finally most mortgages require you to have two months home payments in reserve. That means if you add up the monthly principle and interest, real estate taxes, home insurance, mortgage insurance if applicable and home maintenance, if a condo, you get one month’s home payment. You will need two months home payment in an account. It can be in a 401K or IRA.
You probably have a lot of questions. The best thing to do is speak to a reputable lender. In today’s market that is more important than ever. You want to know the lender will have the money wired in time for your closing. You don’t want the requirements or costs to change while you are going through the process. As a Coldwell Banker Home Loans Mortgage Advisor we have the strongest pre-approval in the industry according to a survey done by Campbell’s Communications. We suggest you speak to a loan officer early in the process so that you know how to improve your credit, what amount you qualify for, the required cash to close and what mortgage products make the most sense for you. Better to know all this early than when it is too late and you lose the house you love.
Then all you have to do is find the house. Happy house hunting!
Phyllis Byrne-Nelson can be reached at: tel - 973-224-2454 and email - phyllis.byrne@mortgagefamily.com.
