There has rarely been a better time to buy a home. Despite the persistent uncertainty in the housing market, a steep drop in prices has made ownership a more attractive option for many. Yet some potential buyers may be sitting on the sidelines assuming they won’t qualify for a loan. It turns out the reality isn’t as stark as many believe.
“There’s no doubt things have tightened up, but it’s not as tight as everyone thinks,’’ said Michael D’Alonzo of the National Association of Mortgage Brokers.
Here’s a look at five factors considered in applications:
The down payment — “The myth that people need 20 percent is exactly that, a myth,’’ said Frank Codel, head of Wells Fargo’s national consumer lending. Codel said a significant portion of Wells Fargo mortgages are for down payments of 5 to 10 percent. Borrowers can also apply for loans from the Federal Housing Authority, which only require a 3.5 down payment.
The catch is that mortgage insurance is required when down payments are less than 20 percent. The cost varies. But with FHA loans, an upfront fee of 1 percent of the loan is tacked on to the mortgage. A 1.1 percent fee is also added to monthly payments.
So on a $200,000 loan, the upfront fee would be $2,000 and the monthly fee would be $183. Mortgage insurance on conventional loans can be cheaper, but will vary depending on your credit score. The insurance can be canceled once you reach 20 percent equity in your home.
Job history — A recent period of unemployment won’t automatically disqualify you. But banks will want to see that you are currently working and that there’s strong reason to believe you will be able to pull in a steady paycheck in the future.
Debt load — Lenders want to know that you are earning enough to handle all of your bills. So all of your debts, including credit card balances and student loans, will be weighed against your household income.
The exact formula for what’s an acceptable level varies. But at Citi, an applicant’s household debt generally can’t be more than 41 percent of their income. That’s including the projected mortgage payments. Other lenders may allow for more wiggle room.
Credit score — Borrowers generally need a credit score of at least 640 to qualify, according to D’Alonzo. The exact FICO score cutoff will vary depending on the lender. But those who have lower scores may still be eligible for an FHA loan. It can work in your favor if you have been paying down debt and working to lift your score over the past year or two.
Keep in mind that your credit score helps determine the interest rate on your mortgage.
Paperwork — One of the big differences in the application process today is that lenders want documentation to verify your financial status. Still, the process can be seamless if all your ducks are in a row. If there are no major hang-ups, the process can take 30 to 45 days.
Candice Choi writes for the Associated Press.