You can't just walk into a bank, flash those pearly whites, and hope for a reasonable mortgage rate. Lenders don't hand out mortgages to just anyone. It's a long and detailed screening process. We specialize in helping first-time homebuyers, figure out what they need to get a mortgage. When looking at homes for sale in Dubuque, Bellevue, Maquoketa, and surrounding towns, our free mortgage calculator will be beneficial.
This guide will help you identify everything you need to bring to the table when you're ready to apply for a mortgage. It will help you demonstrate that you are creditworthy of receiving a huge big pile of cash at a reasonable mortgage rate as well as what to do if you're unable to pass muster on the first go around.
First off, you need to gather up at least 10 pounds of paperwork, like bank statements, pay stubs, tax returns, W-2s, and few other items to get a mortgage loan. Here are the basics:
A GOOD CREDIT SCORE
When you apply for a mortgage, one of the first things your banker will do is to check your credit score. The higher your score, the better your chances of approval.
First things first – check your credit score. Credit Karma is just one of many reputable websites that will provide your score and the details behind it in a matter of minutes.
Although a perfect score is 850, less than one percent of us qualify at that level. Scores higher than 760 are the best from a lender's perspective. It means you'd be eligible for the best interest rates.
A good credit score ranges upward from 700 to 759. Fair scores are in the 650 to 699 range. If you have too many blemishes on your credit history, your score could fall below 650. Late credit card payments, unpaid medical bills are a few examples of things that will lower your credit rating. If you are in this range, you're likely to get turned down for a conventional home loan. Unless you qualify for an FHA Loan (requires a minimum score of 580), you will need to repair your credit to get approved.
While reviewing your credit, you should check to make sure you're the person responsible for any black marks that may appear on your report. A recent study by the Federal Trade Commission revealed that twenty-five percent of all Americans spotted errors in their reports.
If you have bad credit, it may take you up to a year or longer to raise your credit score to where you qualify for a mortgage. Here are some tips on how you can improve your credit.
SUBSTANTIAL & STABLE INCOME
How much income you need is dependent on your debt-to-income ratio (DTI) This figure compares your earnings on your tax returns with your outstanding debts. Qualifying for a home loan requires your income to be high enough to offset your debts, including your possible mortgage payments.
To calculate your DTI ratio, figure out how much you're paying in debt per month—by tallying up things like car payments, student loans, and credit card bills—and divide that amount by your monthly income on your pay stubs.
For example, let's say you're paying $250 in debts monthly while pulling in $5,000. Divide the $250 by $5,000, and you have a DTI ratio of 0.05 or 5%. That's well below the recommended rule of 36%, but keep in mind, you don't own a home yet, and that will push up your DTI.
Once you know your income and debt, you can use an online home affordability calculator to determine how much you can pay for a new house, and remain below that 36% DTI ratio.
Let's take the example above where you make $5,000 a month and pay $250 in debts. Now let's assume you have around $30,000 for a down payment and can get a 30-year mortgage at a fixed interest rate of 5%. Enter these numbers into a home affordability calculator, and this will put you in the ballpark of affording a home worth $243,100.
Lenders like to see at least two years of consistent income history. That can be a challenge for many people who are just starting their careers or are self-employed. If you're in the latter situation and have variable income, you may need additional assets such as a higher down payment to qualify for a mortgage.
ENOUGH MONEY FOR THE DOWN PAYMENT
Most mortgage lenders like to see that you have enough in the bank to make a 20% down payment—which amounts to $50,000 on a $250,000 home. It's hard to fake that because they will be looking at the bank statements you provided. So if you don't enough saved up, it's time to tighten the budget and start saving more.
You have other options, as well.
FHA-backed loans let borrowers make down payments as low as 3.5%. If you've served in the military, the Department of Veterans Affairs loans requires no down payment at all. LEARN MORE ABOUT VA LOANS.
If you are only eligible for a conventional loan, you will need at least a 10% down payment. If you put anything less than 20% down on a conventional loan, you'll need to pay private mortgage insurance (PMI). The monthly PMI premium that can range from 0.3% to 1.5% of the total loan amount.
Feel free to call Aaron at 563-542-2550 if you need more information.