HOW TO PREPARE YOURSELF FOR A MORTGAGE LOAN
The two primary areas that you need to be concerned with as far as prepare for getting a mortgage loan are income and credit.
1. INCOME: For an FHA loan, your monthly payments for your house need to be about 50% of the entire household’s monthly income, MINUS your monthly amount of debt. So, let’s say your gross monthly income is $5,000, and you have $300 worth of monthly payments (car payments, personal loans, etc.). You can get approved for a loan that is half of the gross income minus your monthly debt.
So $5,000 divided in half is $2,500, minus the $300 debt – this means that you can get approved for a loan that makes you pay $2,300. This includes the principal and interest on loans, all property taxes, private mortgage insurance, and homeowner’s insurance.
As far as income goes, having a steady salary that pays you the same amount every year is ideal. You don’t have to have a job like that for more than a few months, especially if you have had jobs before that or you’ve been in school.
However, you’ll have to explain any gaps of unemployment in your past when you speak with a loan officer.
2. CREDIT: Credit scores are absolutely essential in the process of getting a mortgage loan. Just to give you seem hard facts:
Minimum Credit Scores for…
VA loan: 600
FHA loan: 640
It is absolutely necessary to build up some kind of credit for many reasons, and getting a mortgage loan is one of them. A loan officer will require THREE lines of credit that are CURRENTLY opened. That means, if you’ve already paid off your car payment it helps your credit score, but it won’t count toward one of the three open lines of credit. Credit lines are things like rent or mortgage payments, car loans, personal loans, credit card payments, etc. If you absolutely cannot come up with three open lines of credit, they will sometimes be able to pull history from things like paid cell phone bill contracts or utility bills that are in your name.
But, if you have no credit right now, PLEASE PLEASE PLEASE go out and take out a loan, open a credit card or something. You can even go to your bank and get a pre-paid credit card from them that will build up your score. (This doesn’t count with the gift card credit cards you buy at the store.)
When you do have a line of credit, like a credit card, the way to improve your credit score is to have the lowest balance possible, and the highest credit limit possible. Ideally, you’d like the have your balance lower than 35% of your credit limit. So if you have a $3,000 limit, keep your balance under $1,500, if not under $1,000 if possible.
These are the two most important parts to getting a mortgage loan. Getting a job with a good salary is something fairly obvious, and something you don’t have to think too hard about.
Credit scores, and open lines of credit, however, are things that not everyone thinks about, and require some attention. So, do some research, don’t just use this as your only reference – use it as something to make you start thinking about it.
If most of you are like me, I spent most of my life thinking that buying a home was something for people with massive savings accounts and six figure incomes, and that renting was for people like me without any of the above. In the last six months, as I’ve gotten my real estate license, I’ve also had extensive lessons on finance – in particular, financing a home.
I want to pass on some of this information, not only to support my own real estate business, but also to inform my friends and acquaintances about financial decisions that can affect their futures in a major way.
In our current market, home prices and interest rates have hit an all-time low, and without any psychic abilities, most people can predict that things will only go up from here. With current rental prices versus current housing prices, just about everyone is better off buying a house. Besides having lower or equal monthly payments, and tax incentives, you’re left with an asset that will (generally) at least bring you back the money that you’ve spent – as opposed to renting, which is essentially throwing your money away. You will never see a dollar of your rent money again, whereas every mortgage payment you pay will generally give you some return – and if nothing else, will give you an asset that puts you in a more financially stable position.
After taking several classes, and sitting down with a loan officer from my company’s affiliate mortgage company, Prosperity Mortgage, I’ve put together some information that I think will be useful to just about anyone. I have explained the different types of financing available, samples of the costs of renting versus buying, and some practical information about how to prepare oneself for getting a mortgage loan.
First, I’ll start with some real life examples of why buying makes more sense. These examples are from the Fredericksburg real estate market, but I can finger similar examples in just about any market – Richmond and Northern Virginia especially.
RENTING VS. BUYING
Example Number One:
RENT: A one bedroom apartment in the Fredericksburg area can run anywhere from $750/month and up. Let’s use an example that I have in front of me – an apartment in a building with four other apartment units. It is 1 bedroom, 1 bath, a kitchen and a living space. It is $795/month, and it is in Fredericksburg city on Route 1.
BUY: I have found several properties in the area that are around $100,000. Specifically, I have a house in front of me that is listed for $120,000 with 2 bedrooms, 1.5 baths, a front porch, kitchen, living room, dining room on two floors. It also has a backyard. The house is larger, does not share any space with other people, and is in similar condition.
To buy this house, let’s use a down payment of 5%, although there are several loans available that require a lower down payment than this.
The down payment would be $6,000. (But don’t let this scare you off, there are loans available that require absolutely no down payments, or significantly smaller ones.)
For a standard 30 year mortgage, with a 3.25% interest rate, a monthly payment would be $496.14. If you want to add taxes ($100/month), hazard insurance ($30), and private mortgage insurance ($49.50) the monthly payment would total to $675.54.
(This doesn’t even include the homeowner tax write off that one would most likely receive, and the rental payment does not include renters’ insurance.)
Example Number Two:
RENT: I have a townhome in Stafford County in front of me. The property has 3 bedrooms, 2 full baths, 2 half baths, living room, kitchen, and one “other” room, and small backyard. 2000 square feet. The rent is $1,495/month.
BUY: I now have a detached home in a similar area in Stafford County. The home is brick and has 3 bedrooms, 2 full baths, one half bath, a 2-car garage, living room, dining room, kitchen, family room, and two “other rooms,” with fenced in backyard. 2240 square feet. The listing price is $249,000.
These homes are in similar conditions, and are comparable in most ways, except that the home for sale has more space, more rooms, more land, and is a detached house not a townhouse.
A 5% down payment would be $12,450. A monthly mortgage payment would be $1, 029.48. Property taxes would run around $207/month, and $162/month for insurance. The grand total would be $1,401.92/month. Again, this does not include the tax break that would be given to a homeowner, and I did not figure in renters’ insurance to the rental payment.
Are you getting the picture?
Now, if you are concerned about the down payment, keep reading, because there are options there as well.
TYPES OF LOANS
For many of you reading this, you will be buying your first home. So I’ll start with the First Time Homebuyer’s Loan (FHA loan.)
1. FHA LOANS: For first time homebuyers only, these loans are not funded by the government, they are insured by the government. So, a loan must be taken out from a regular loan officer first. Right now the interest rates on FHA are 3.125-3.25%. Most FHA loans require 3.5% down payments.
One very important thing about FHA loans, is that they are the only type of loan that allows for a non-occupant co-borrower. This means that someone like your mother or father can help you to qualify for the loan, and go onto the mortgage loan with you. For those of you who are concerned about qualifying for your first loan, this is very important! However, the primary resident of the house does have to have some income – even if you can’t qualify for the entire loan, you do have to have some level of income to pay the monthly payment.
2. FHA-PLUS LOANS: Similar to an FHA loan, these are even better. An FHA Plus loan allows for all the same rates and policies as the FHA loan, except that it is 100% financing, and no down payment is required. An FHA Plus loan essentially gives you two different loans, one for the 3.5% down payment, and one for the rest of the mortgage. It doesn’t affect your monthly payment by a whole lot, and it takes away that stress of having to put down a big chunk of cash at the beginning of the transaction.
3. CONVENTIONAL LOANS: Conventional loans used to require 20% down… but alas, times have changed. Many conventional loans will accept as little as 5% down now. Conventional loan interest rates are 3.25-3.375%. These are for people who have already bought their first homes, and are often used by investors.
4. VA Loans: VA loans are similar to FHA loans in that they are insured by the federal government, and carry lower interest rates. These loans are available for veterans only. Right now the interest rates are 3.125-3.25% (the same as FHA.) Also, VA loans allow for 100% financing – which means not having to come up with a down payment.
5. RENOVATION LOANS: Many of the homes in the lower price brackets often need a little work. Renovation loans allow you to get a mortgage loan, and all of the money needed for renovation all in one loan. These can be done with FHA, VA, and conventional loans, and they generally require the same down payments, and carry the same interest rates as other loans. With all the super cheap foreclosures or short sales out there now, this is an amazing tool that is way under-utilized!
Anne Morgan Pates
Anne Morgan Pates has worked in Real Estate and in Sales & Marketing since 2012. She currently runs her own Marketing business, FXBG Real Estate &.Small Business Marketing.