Find out how to qualify for a mortgage or a refinance and whether it's possible to get a mortgage with bad credit. Follow a suggested checklist to make sure that you're in good financial shape before you apply for a mortgage.
Money Girl
182 MG How to Qualify for a Mortgage or Refinance
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Hi everyone, and welcome back to Money Girls Quick and Dirty Tips for a richer life. I'm Laura Adams. With interest rates at historic lows, you may have wondered whether you should pull the trigger on buying a home, buying an investment property or refinancing a mortgage. Even though interest rates and home values are low, lending standards are higher than ever. In this podcast, we'll explore what it takes to qualify for a conventional mortgage in the current credit environment. Before you apply for a new mortgage or a refinance, you need to make sure that you're in good financial shape. If you don't have the financial chops to qualify or have more debt than is allowed for a refinance, for instance, going through the application process will be a waste of time. It's possible that you could be approved for a loan, but at an outrageously high interest rate. Each lending institution has different underwriting guidelines for evaluating a potential borrower. And I'm sure you know that due to the credit crisis, lending standards are now tougher than ever. When you apply for a home loan, you're generally judged on the following five categories. Income Do you earn enough to make mortgage payments? And is it likely that this income will continue in the future? Credit score How likely are you to make on-time mortgage payments based on your credit history? Debt Will you have enough cash flow left over to make a mortgage payment after paying your other liabilities? Savings Do you have enough for a down payment plus more cash on hand to pay your mortgage if your income is reduced? Financial ratios How much debt do you have relative to your income? In addition to those five qualification categories, you need to have at least 20% equity to refinance a primary residence. Equity is the difference between how much a property is worth and the amount that you owe on it. It's based on your home's current appraised market value, not what you paid for it. So if your property is worth $250,000 today and you still owe $225,000, you have equity of $25,000, which comes to 10%. In most cases, that wouldn't be enough equity to qualify for a refinance, because as I mentioned, 20% is usually the magic number. Some lenders may even require you to have more than 20% equity to refinance an investment property. Here's a checklist with essential tasks to accomplish before you contact a mortgage lender. 1. Download copies of your credit reports from annualcreditreport.com and check them carefully for errors. You can get a free report from each of the three major credit agencies, Equifax, Experian, and TransUnion once a year. If you find any discrepancies, get your report corrected right away. 2. Get your credit score for free at creditkarma.com and find out how the various items on your credit report, like your payment history and credit utilization, affect your score. You'll be able to see how you stack up against the national credit averages. Excellent credit is the ticket for getting alone with a low interest rate that will save you thousands of dollars over the long run. 3. Increase your credit score if it's not high enough to qualify for a loan with a low interest rate. Here's where lenders draw the line. If your FICO score is below 600, you probably won't be approved for a conventional loan. If your score is in the 600s, you may receive loan offers with high interest rates. But if your credit score is in the mid-700s or higher, bingo, that's the range where you'll qualify for the lowest interest rates. By the way, if you have a co-barrower, their good credit won't offset your bad credit or vice versa. You can't improve your credit overnight, but paying down balances on credit cards and outstanding loans is a quick way to boost it. Be sure to listen to episode 164 "How to Raise Your Credit Score Fast." 4. Research different loan products and interest rates at Bankrate.com Find average rates for fixed rate and adjustable rate mortgages so you'll know if a lender's offer is competitive. How much house you can afford largely depends on your mortgages' interest rate and term. If you plan on keeping your home for the long-term, getting a fixed rate loan is usually best. A longer term, like 30 years, lowers the monthly payment, but also comes with a higher interest rate. That means over the life of a 30-year mortgage, you pay substantially more interest as compared to a 15-year mortgage. 5. Know what you can afford by creating a budget and evaluating how much cash you have. You generally need to make a down payment of at least 10% for a conventional loan or 20% for an investment property. With 20% or more down, you can avoid having to pay private mortgage insurance or PMI, which typically costs 1/2 to 1% or more of your loan amount per year. After you turn over your down payment money, you still need to have a healthy emergency fund and of course, you still need to be able to save for retirement each month while you're making your mortgage payment. Kendra manages your payroll. She's also six weeks pregnant. Maybe it's time for a group dental plan with extra TLC for moms to be. Green from within, United Concordia Dental. Learn more at grandwithucd.com products under written by United Concordia Insurance Company. Now at T-Mobile, get four 5G phones on us and four lines for $25 a line per month when you switch with eligible traders, all on America's largest 5G network. Minimum of four lines for $25 per line per month without a paid discount using debit or bank account, $5 more per line without auto pay, plus taxes and fees and $10 device connection charge. Phones would be a 24-monthly bill credits for well qualified customers. Contact us before canceling entire accounts to continue bill credits or credit stop and balance on a required finance agreement too. Bill credits and if you pay off devices early, ctmobile.com. I love learning and anything that makes learning easier. If you're a parent and your child needs some homework help, then Ixcel is a right for your family. Ixcel is an online learning program for kids covering math, language arts, science and social studies. Ixcel has interactive practice problems for topics from pre-K to 12th grade and everything is organized by grade and subject. As kids practice, they get positive feedback, awards and explanations for wrong answers. Ixcel figures out what your kids need more help with and recommends more topics to practice. Their videos, lessons, sample problems and learning games too. One subscription to Ixcel gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder Ixcel is used in 95 of the top 100 school districts. I think the positive feedback that Ixcel gives is really crucial when it comes to learning. So make an impact on your child's learning. Get Ixcel now and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at Ixcel.com/moneygirl. Visit Ixcel.com/moneygirl to get the most effective learning program out there at the best price. 6. Calculate your debt-to-income ratios to make sure you won't exceed the typical loan underwriting requirements. Lenders want to know the percentage of your monthly gross or pre-tax income that would be used to pay the mortgage. Generally, it can exceed 28 to 30%. To run the numbers yourself, use the mortgage calculator at mortgage-calc.com. But don't forget to add in the estimated property taxes and homeowners insurance. Ask a realtor or an insurance agent to estimate those costs for you. The total mortgage obligation is known as the PITI payment, which stands for principal, interest, taxes and insurance. For example, if your PITI is $1,500 and your monthly income is $5,000, then your mortgage-to-income ratio is 0.3% or 30%. As I mentioned, you'll generally need to stay below 30% to be approved. Lenders also evaluate the percentage of your income that would go toward all your monthly obligations, including the mortgage, credit cards, student loans, auto loans and so on. Your total debt-to-income ratio normally shouldn't be higher than 36 to 40%. However, as I said earlier, each lender has a different standard, and having an excellent credit score or shelling out a large down payment may give you some leeway with both of those financial ratios. If you've worked through this checklist and you feel like you're ready to apply for a loan, start gathering your paperwork. You'll need several months of pay stubs and W-2 forms from the past two or three years. If you're self-employed or have a variable income, lenders will ask for your tax returns from the last two or three years. Also, make copies or print out bank and investment account statements for the past six months. If you don't qualify for a conventional loan and you're a veteran on active military duty, a reservist or in the National Guard, you may be eligible for a VA loan. You don't have to come up with a down payment for a VA loan because you're allowed to finance 100%. They're issued by approved lenders and guaranteed by the U.S. Department of Veterans Affairs. For more information, visit homeloans.va.gov. Another alternative to a conventional loan is one insured by the FHA, or Federal Housing Administration. Lenders approved to offer FHA loans can be more flexible with their approval standards and require a lower down payment. Get more information at HUD.gov and see what home buying programs are available in your state. A quick and dirty tip for buying a home or investment property is to get pre-qualified for a loan before you start shopping. That lets a seller or real estate agent know that you're serious about making a deal. Talk to several lenders or mortgage brokers and shop carefully for a product with the lowest interest rate and total fees. We want to know more about who's listening to MoneyGirl. Please visit quickanddirtytips.com to take our listener survey. You can find it by clicking on the blue "Listener Survey" button at the bottom of the right column on every page of the website. Thanks for taking the time to help us out by sharing your opinions. As always, you can email your questions or comments to money@quickanddirtytips.com, send a tweet to @LaraAtoms or make a post on the MoneyGirl Facebook page. I'm glad you're listening. Chachin. That's all for now. Courtesy of MoneyGirl, your guide to our richer life. Dave's your supply chain wizard. He also has diabetes. 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