Applying for a mortgage seems like a daunting task, and to be honest, it can be. Before you start looking for a new home, consider these five things first. You may already be in a great position to purchase a home. And remember, you aren’t the first person to have questions about obtaining a mortgage loan.
1. Debt to Income Ratio
When applying for a mortgage loan, maximum debt to income ratio allowed by Fannie Mae is 50%. This means that if your gross monthly income is $4,000, the maximum allowable monthly debt you can have is $2,000. This includes your current car loans, student loans, credit card payments, and your future mortgage payment. Therefore, if you’re looking to get pre-approved for the maximum amount, pay off those pesky credit card balances of $300 or less, that way the credit report will show $0.00 for a minimum payment.
2. Credit History and Your Credit Score
Credit score is extremely important, and a score of 740 or higher can save you a lot of money (hundreds, even thousands!) in points. Points are a percentage of the loan amount which are added to your closing costs. A few tips to boost your score are to pay down credit cards, stop buying on credit, and don’t open any new credit lines. A higher credit score will also reduce your PMI (Private Mortgage Insurance) payment on conventional mortgages.
3. Down Payment From Various Sources
- Gift – Funds that are given to you from an immediate family member
- Saved funds (must be in account for at least 2 months)
- Retirement funds
- Cash on hand is NOT an acceptable form of a down payment. If you have cash, deposit it into an account so the funds can be verified. Remember, it must be there for at least 2 months!
4. PMI – Private Mortgage Insurance
When you have a down payment of less than 20%, usually you will have to pay PMI, or Private Mortgage Insurance. PMI protects the lender in case you default on your mortgage payments. The PMI payment is mostly driven by credit score and down payment, so having a high credit score will save you money!
5. First Time Home Buyer Programs
Workers Credit Union offers mortgage products that cater to first time home buyers. These mortgage products offer low down payment options, and are great for buyers with low to average credit scores.
- USDA Mortgage Loan – buyers who are looking to purchase a single family home in rural towns/cities, $0.00 down, minimum credit score of 620, and maximum income limit.
- FHA Loan – minimum credit score of 600, 3.5% down payment, no income limitations, maximum loan amounts based on county.
- Home Ready Program – minimum credit score of 680, minimum of 3% down payment, maximum income limit based on town AMI (Area Median Income). To see if you’re eligible for this program, click here. This program also requires an online home buyers course.
About the Author:
Eric Hague – Senior Mortgage Originator
Eric has more than 10 years of credit union experience. He has served our membership for several years helping them with home purchase and refinancing. Eric has his degree in Business Administration from Worcester State University. He is committed to providing the highest level of service to first-time home buyers, those with growing families or those looking to downsize to a smaller home. He loves a challenge, and will do the number crunching to ensure you are getting the very best product Workers Credit Union has to offer. Eric will strive to meet your financial needs with superb service and individual attention.
Eric can be reached at 1-978-353-7143 or [email protected] NMLS# 745023