Before the 2008 housing crisis, if you had a pulse, you could get a loan. Financial institutions learned from The Great Recession, and now buying a home is more regulated than it was 10 years ago, but it’s for all the right reasons.
(For more information on the 2008 housing crisis, read our review of the 2015 film The Big Short.)
There are now rules and underwriting guidelines in place to protect consumers against predatory lending practices and to make sure applicants are only borrowing what they can realistically afford.
If you’re looking to buy a home and need a mortgage, there are borrowing standards that must be met before you can be approved. We’re going to give you an inside look at the best ways to qualify for your next mortgage loan:
Check Your Credit Report to Make Sure it’s Accurate
When a lender says they need to “pull your credit,” they often use the three major bureaus: Experian, Equifax, and TransUnion. Before applying, use annualcreditreport.com to review your credit scores and resolve any errors. Doing so could have a positive impact on your score.
If Your Credit Score is Below 640, Improve it Before Applying
A FICO® Score below 640 is generally seen as subprime for a mortgage. With a score below 640, you would likely not qualify for a mortgage, and if you did, your interest rate would be very high. Even small improvements to your credit can result in big savings when it comes to a mortgage. Here are 7 ways to improve your score.
Get Your Debt-to-Income Ratio Below 43%
Lenders want to ensure you’re borrowing only what you can truly afford. To determine this, lenders use what’s called a debt-to-income ratio. This is calculated by taking all the debts you are legally responsible for and dividing them by your gross income.
For example, let’s say an applicant makes $4,000/month. She wants to get a mortgage for a home that would cost her $900/month. She also pays $400 for a car payment, $250 in student loans, and has a minimum credit card payment of $80/month. If you add that up, her total debt obligations are $1,630. Take that number and divide it by her gross income of $4,000. That makes her debt-to-income ratio 40%. Typically, if you’re under 43%, lenders feel comfortable moving forward.
Make Sure Your Credit Utilization Ratio is Low
This ratio is your credit card balance divided by your credit limit. For example, if your credit limit is $10,000, and your balance is $6,000, your credit utilization ratio is 60%. The closer you are to your limit, the higher your credit utilization score will be, which can have a negative effect during the application process. This ratio plays a part in your FICO® Score, so pay down your balance as much as you can before applying for a mortgage.
Make All Your Payments on Time
Payment history on your loans and credit cards makes up 35% of your FICO® Score. A single late payment could drop your score by as much as 75 points, which could change your interest rate or disqualify you completely. The easiest way to pay on time is to set up automatic payments. Set it, forget it, and never miss a payment again.
Have Some Cash on Hand
Lenders will want to know that you have enough money to cover closing costs and your down payment, so start saving early. Closing costs can range between 2% and 5% of the total loan amount, but your down payment can vary. The standard down payment is 20% of your home cost, but many lenders (including Connexus) offer loan options with down payment requirements as low as 3%, which means you can qualify for your loan sooner with less money up front.
If you can check these six areas off your list, you should be in great shape to own a home. If you still have questions, feel free to call our dedicated Mortgage Team at 715.847.4726. Our team is ready to help you find the perfect mortgage option for your financial situation.
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Connexus Credit Union and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Connexus Credit Union and Fair Isaac do not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating.