Qualifying for a mortgage loan in today's market may be tougher than it was just last year.
Lenders have tightened underwriting requirements for the loan approval process and, in many instances, eliminated stated income and no down payment loans. Many borrowers took advantage of these so-called subprime loans over the last few years, but today they are among those reported to be having trouble making their monthly mortgage payments.
Here's what you need to know about obtaining a mortgage in today's market:
Understanding Interest Rates
Fortunately, interest rates are near historic lows, ending 2014 around 3.8 percent for a traditional 30-year, fixed-rate mortgage and about 3 percent for a one-year adjustable rate mortgage, or ARM. To put the numbers into perspective, interest rates climbed as high as 9 percent during the last housing slowdown in the 1990s and hit 12 percent in the 1980s.
Points are a form of prepaid interest that you may be required to pay your lender upon the closing of your loan transaction, above your other fees and interest. There are origination points, which cover your lender's fees, and discount points, known as buyback points, which are paid in exchange for lowering your monthly interest rate. With either option, one point is equal to 1 percent of your loan amount. For example, one point on a loan for a median-priced home in California at $500,000 would equal $5,000. Points may sometimes be charged based on your creditworthiness and your debt-to-income ratio.
Getting preapproved for a home loan will allow you to take a written letter of preapproval from a lender as you shop around for your new home. The preapproval letter may indicate to a seller that you are a serious buyer. When you go to a lender for preapproval, you may be asked to produce income statements, and have your credit and debt information carefully scrutinized — be prepared, and collect all documents ahead of time to facilitate the process. When you are attempting to get preapproved or apply for a mortgage, lenders will review your credit report, which provides a snapshot of your borrowing and repayment history, as well as any outstanding debt. A common credit score is also called a FICO score. (FICO stands for Fair Isaac Corp., the company that developed the scoring method.) FICO scores range from 300 to 850 points (and are rated poor to fair to good to excellent), depending on your debt load and repayment history A score closer to 850 or excellent will not only help you qualify for a loan more easily, but may lower your points and fees.
Loans for First-Time Buyers
There are several programs available that offer loan assistance options for first-time home buyers. FHA-insured loans, for example, are insured by the federal government against default, and are designed to help qualified borrowers who can't afford the down payment required by certain lenders. FHA loans provide up to approximately 97 percent financing, meaning the buyer puts down 3 percent, but you may be required to cover other costs, such as mortgage insurance premiums, and you'll need to meet certain credit qualifications. VA loans are guaranteed by the U.S. Deptartment of Veterans Affairs and offer low- to no-down payment options for qualified first-time buyers who can provide proof of military service. The minimum amount granted for a VA loan is $36,000, but this amount may be increased, depending on the borrower's credit history. You may also want to check with your city government for referrals to local, state, and federal programs that offer home buyers assistance for qualified buyers.