Your homebuying experience can vary depending on your preparation, and the team you have at your side. The lender you choose, the real estate professional involved, and other factors can make a big difference when buying a home.
If you know someone who’s recently been though a less-than-pleasurable home buying experience, you may be apprehensive about the process.
Fortunately, buying a home is easier than you think.
The key is understanding what it takes to get approved for a mortgage, and being properly prepared. These things will make all the difference in the story you will soon be telling your friends.
How to get approved for a mortgage
One of the best ways to ensure a smooth home buying process is what you do before you begin your home search.
First, check your credit report and know your credit scores.
Taking this step early in the process will tell you which loans may work better for you. Checking your credit will also give you time to clear up any possible errors or issues you find.
Mortgage pre-approval, without the pressure of a closing date, is easier than trying to engineer a full approval from the ground up. And having a pre-approved mortgage means you can close faster when you’re ready to buy.
If you’re pre-approved, you will have less to worry about when you begin your home search. You will know you’re a qualified buyer, and your offers will get more respect from sellers and their agents.
More homebuyers are securing loan approval
According to mortgage origination software giant Ellie Mae, the closing rates for loans originated in May 2017 increased to more than 70 percent. This is great news for homebuyers, as it means more approvals for mortgage applicants.
While some lenders are capable of closing loans in a much shorter time frame, the typical number of days to close a loan from application averaged 42 days. (Mortgage pre-approval goes a long way toward shortening this timeframe.)
A common myth is that most folks buying or refinancing a home have a near-perfect credit score. In reality, the average FICO score on all closed loans is 723, and for FHA mortgages, it’s just 684. Many homebuyers are purchasing homes with considerably lower scores.
Home buying eligibility
Over-estimating what you need to qualify for a mortgage can make you anxious and gun shy about applying. It’s not actually that hard to get into a home as long as you meet a few basic requirements.
Many would-be homebuyers still think you need 20 percent down in order to purchase a home. Typically, the misconception of needing 20 percent is related to mortgage insurance.
Not only is 20 percent down not necessary, minimum down payment requirements typically range between zero to five percent.
Fannie Mae and Freddie Mac loans, known in the industry as conforming loans, even allow 97 percent financing, with just three percent down. FHA, which is also well-known for getting homebuyers approved with less-than-perfect credit, only requires 3.5 percent down.
Don’t have excellent credit? No need to fret.
Although the average credit score for May’s homebuyers was 723, the minimum requirements are significantly lower.
Fannie Mae and Freddie Mac require minimum FICO scores of just 620.
Though many lenders impose “investor overlays” that require homebuyers to have at least a 580 FICO, FHA loans require a minimum FICO score of just 500, Both VA and USDA loans have no minimum FICO score requirements.
Debt-to-income (DTI) ratio
One of the most important factors for mortgage approval is the relationship between your monthly income and your monthly debt. This is called your debt-to-income ratio (DTI).
Your DTI is the total of your monthly debt payments, including your future mortgage payment and accounts like auto loans, credit card payments, and student debt, divided by your total before-tax income. Living expenses don’t count.
If, for instance, your new mortgage payment (including property taxes and homeowners insurance) is $1,000 a month, and your car and credit cards come to $500 a month, your total debt is $1,500 a month. If your gross monthly income is $3,000 a month, your DTI is 50 percent. $1,500 / $3,000 = .5.
Most programs set the maximum DTI between 38 and 50 percent. In general, the stronger your application, the higher you can push those ratios.
Making mortgage approval easier
Changes in the mortgage industry are making it easier for applicants to get approved and buy homes.
For example, the Consumer Protection Financial Bureau (CFPB) determined that of the millions of consumers with medical collections on their credit reports aren’t as likely to default on future credit accounts as those with other types of collections. For this reason, many programs now treat medical debt differently.
Another major reason that homebuyers put off buying a home is that they think they don’t have enough money needed for their down payment.
In fact, many programs require very little down — from zero to five percent. Even better, down payment assistance programs can help with grants or loans. Many who qualify have no idea this kind of help exists.
This article originally appeared on The Mortgage Reports