Sunday, 24 April 2016

Mortgage Tips: Getting a Great Mortgage

You need to do a lot more than just comparison shopping to get a great mortgage rate. Moreover, lenders consider more than your credit score to determine the rate to charge you. There are different factors that lenders take into consideration to determine whether you qualify for a mortgage, how much you qualify for and the terms of the loan.

If you wish to get a mortgage at a good rate, you should be well-qualified. The mortgage tips below will help you understand the key criteria that lenders consider when evaluating mortgage applications.

Credit Scores
Your credit score is one of the criteria used to determine whether you qualify for a loan and the rate you will pay. Generally, the higher your credit score, the lower the rate you will pay. As your credit score goes down, your rates go up.

Most lenders require borrowers to have a minimum credit score of 620 to qualify for a home loan. However, there are mortgage programs that allow borrowers with credit scores as low as 500 get home loans.

Employment and Income Stability
Lenders usually prefer borrowers with proven income stability. Some lenders require borrowers to have been in steady employment for the last two years. Declining earnings in your employment or long periods of unemployment will make it difficult to get approved for a mortgage.

For self-employed borrowers, lenders are even stricter. You will have to provide documentation of your business income and tax returns for the last two years to determine your suitability for a loan. Apart from this, you will have to fill some forms to enable the lender to obtain transcripts of your returns and verify the information.

Debt-to-Income Ratio
Debt-to-income (DTI) ratio comes in two forms; the back-end ratio and front-end ratio. To determine the back-end ratio, you need to total your monthly minimum debt payments and add the proposed new housing payment, and divide the amount by your stable monthly gross income. On the flipside, the front-end ratio simply focuses on your housing costs, excluding all other debts.

Most lenders like to see a front-end ratio of below 28% and a back-end ratio or below 36%. These requirements may however vary depending on the type of mortgage you wish to apply for.

Down Payment
Generally, most lenders will require you to provide a 20% down payment on the purchase price of the house. Mortgages are price adjusted based on risk factors and hence a loan with a 20% down is consider less risky than one with a 5% down. Get detailed information by clicking here.

Another advantage of paying a larger down payment is that you won't have to pay private mortgage insurance (PMI), which will increase your costs.

Cash Reserves
When dealing with mortgages, cash reserves are measured in terms of the number of months' worth of payments you have saved in cash. You may have reserves in certificates of deposits, money market funds, checking or savings accounts.

Most lenders require borrowers to have cash reserves for at least two months. If you are a higher risk borrower, the cash reserve requirement may be higher.

With the above tips, you should know what to do to score good rates when applying for a mortgage.