“When you buy a home, it’s all about the numbers. Your mortgage rate is based on your credit scores, debt-to-income, and how much of a down payment you can afford.
- Know your credit score. It can fall between 300 and 850. Lenders use this number, which is compiled by three credit bureaus, to give a quick snapshot of your credit-worthiness. To find out your score, visit www.annualcreditreport.com – the site where you can get free copies of your credit report.
- Know your income-to-debt ratio = income to mortgage debt and income to total debt. To qualify for a 30-year, fixed rate mortgage (FHA) your income to mortgage debt can be no higher that 29% of gross annual income. If you’re carrying credit card debt, student loans, or pay child support, your monthly debt service must be counted.
- Know your down payment. For most loans your credit scores affect down payment requirements. If you have a high credit score, you can get an FHA-guaranteed loan with only 3.5% down, but if your scores are low, you may be required to put as much as 10% down. FHA loans with less than 20% down require mortgage insurance that will not be discharged unless the home is refinanced or sold.
Conventional loans are sold by banks as securities to Fannie Mae and Freddie Mac, with the best rates only available to consumers with 20% down. You can obtain both FHA or conventional loans with less money down, but expect to pay a mortgage insurance premium, which reduces the risk for the lender.
Where your down payment originates also makes a difference to lender. If you have saved the money yourself, or it comes from a recent real estate transaction, lenders tend to be more relaxed than if your parents are giving you the money as a gift.
All these numbers have to dovetail and make sense to the lender, so you can comfortably afford the home you want to buy.”
SOURCE: Blanche Evans for realtytimes.com