What a customer needs to get a mortgage
NEW YORK --With the mortgage market in upheaval, fewer borrowers are qualifying for loans -- and those who do need all-but-pristine documentation and credit histories.
Credit score is the most important aspect of getting a mortgage in today's market, said Russell Martin, a residential mortgage adviser and author of SmartMortgageAdvice.com.
Marginal buyers with poor credit scores have all but been pushed out of the market, Martin said. He suggested a credit score of 680 is the minimum needed to get a loan today, and a credit score above 720 will help lower rates significantly.
A credit score is given to a borrower based on his or her past repayment of loans and helps a lender determine how likely the customer is to repay future loans. Regular, on-time repayment of loans such as mortgages, car payments, credit cards and student loans helps a customer improve his or her credit score, while missing payments will lower it. Scores range between 300 and 850, with a prime borrower typically having a score better than 720.
Within the credit score, customers must also look at their credit history and any delinquencies they have had in the past, said Dan Green, a certified mortgage planning specialist and author of TheMortgageReports.com.
Green recommends anyone planning to buy a house in the next year get a free copy of their credit report and make sure there are no delinquent bills of any kind, whether it be credit cards, car payments or even a cell phone bill. Any errors or past-due bills should be corrected or paid off immediately, before the borrower tries to buy a house, Green said.
"Any delinquencies will be scrutinized," Green said. Lenders are looking at a person's history of repayment before anything else, he said.
Once the credit information is handled, borrowers must be prepared to fully document income and assets because no-documentation loans are a thing of the past, Martin said.
For an hourly wage earner or person working on salary, that means copies of W2s and pay stubs. For someone self-employed, showing full income via tax returns is a must.
Borrowers who have recently started a business or have recently been hired to commission-paying jobs are going to find it more difficult to buy a house because they have no track record for earnings, Green said.
More documentation is needed now than even just a few months ago to prove a customer has adequate reserves in the bank as well. Mortgage lenders will look for customers to verify they have "at a bare minimum" two months worth of mortgage, insurance and tax payments in reserves, Green said.
For a customer looking to take out a "jumbo" mortgage -- a loan for more than $417,000 -- showing assets that can be used to make six months worth of payments is desirable, Martin said.
Customers can still get by without making a down payment, though. Fannie Mae and Freddie Mac, along with some other private lenders, have programs for first-time homebuyers to purchase a house without a down payment, Green said. But, purchasing a house with no money down now requires a clean credit history.
Ideally, customers need at least 5 percent of the purchase price for a down payment, Martin said.
Loans are easier to come by if they are for less than $417,000, the cap below which government-sponsored entities Fannie Mae and Freddie Mac will purchase loans. Borrowers looking for loans larger than that size will still likely be able to get them, but their interest rates will probably be higher, Martin said.
With a full loan package, including all asset and wage documentation, it will take at least a week to be approved for a loan as underwriters are more stringent than ever, Martin said.
