Without a doubt, industry guidelines have tightened, and lending restrictions have increased for home financing. If you are planning to purchase a home, there a few things to think about and certain documentation you should be prepared to provide.
1. If your credit score is below 720, your interest rate could be .25% higher than a homebuyer with a score of 720. Factors effecting your credit score could be the following:
a) revolving debt balance vs. credit limit
b) late payments
c) excessive credit inquiries
Ideally, you want your revolving credit card debt to be 1/3 of the available credit limit. Simply paying down a credit card could increase your credit score by 10 points, which may be just what you need to push your middle score over the 720 mark.
2. You will have to show 2 years of consecutive employment. If you are a W2 wage earner, you will provide your 2008 and 2009 W2’s. If you are self-employed, you will be required to provide 2007 and 2008 tax returns and will be qualified for the loan based on the adjusted income. If you want to use bonus income to qualify for the mortgage, you will need a 2-year history of earnings.
3. When considering down payment options, keep in mind that you will pay mortgage insurance if you are not putting down at least 20%. The minimum down payment is available with FHA and requires just 3.5% down with an upfront 2.25% mortgage insurance premium beginning April 5th. FHA requires homeowners to pay mortgage insurance for a minimum of 5 years AND until there is 21% equity in the property.
If you do not want to put down 20% and do not want the obligation of mortgage insurance for 5 years, you can put down 10% and obtain a conforming loan with mortgage insurance that you are required to pay until you have 20% equity in the home. This can be achieved by paying more to principal and/or increase in property value.
You also have the option of putting down 15% and paying mortgage insurance. Typically, mortgage insurance for FHA loans is less than conforming, but conforming programs do not require an up-front premium and a finite mortgage insurance payment period.
4. The maximum debt-to-income ratio is now 45%. Your total monthly housing payment plus all revolving and installment debt can not exceed 45% of your gross income.
5. Which program is right for you? Since the 30-year fixed is at an all time low, most homebuyers are taking advantage of locking into a low rate for a fixed period. However, if you plan to stay in your home for only 5 to 7 years, you may want to consider a 5 or 7 year ARM. These interest rates have been down to 3.25% because the LIBOR index is extremely low right now. FHA also offers ARM programs which offers a lower rate than the 30-year fixed FHA.
About the author
Jennifer Murawski is a loan specialist with First Financial Services, Inc. in Washington, D.C. Browse loan programs, decision-making tools and calculators on her website.