Thursday, August 20, 2020

How to Qualify for a Mortgage During a Pandemic

Thinking about buying a house? You are not alone. With record-low interest rates right now, many people who have not lost a job, or have even experienced an increase in income related to COVID-19, are in the housing market. Earlier this week, reported an average interest rate of 3.14% for a 30-year purchase mortgage (vs. 3.39% for loan refinancing).

Unless you have a big bank account or substantial profit from a previously-owned home, you will need a mortgage to become a homeowner. Before shopping around for a mortgage and a house or condo, prepare to put your best financial foot forward.

Below is a list of items that mortgage lenders are looking for:

Good Credit Score- Applicants in the mid-700s up to the maximum FICO credit score of 850 will receive the lowest available interest rates. The two most important things that someone can do to build and maintain a good credit score are making debt repayments on time and borrowing a small (30% or lower) percentage of their available credit line.

Low Debt Ratios- Ratios are calculated using a borrower’s anticipated PITI: Principal, Interest, [property] Taxes, and [homeowners] Insurance. A good front-end ratio [PITI ÷ gross monthly income] is 28% or less and a good back-end ratio [PITI + monthly consumer debt payments ÷ gross monthly income] is 36% or less. Each lender has its own % guidelines.

Stable Income and Assets- Lenders want to see a stable work history or net income from a business, if self-employed. Expect them to request documents such as income tax returns and/or W-2 forms. They may also call your employer to verify your job status and request details about bank account balances, investment accounts, and other financial assets.

Adequate Savings- Lenders like to see money set aside by home buyers for a down payment and closing costs. Ideally 20% of a home’s purchase price is recommended as a down payment. Lenders like buyers to have some “skin in the game” and buyers do not have to purchase private mortgage insurance (PMI). Many borrowers put down less than 20%, however.

If home buyers have all of the above qualifications, they should apply to be pre-approved for a mortgage before shopping for a house. Pre-approved loan limits will inform the house selection process and sellers will view pre-approved buyers more favorably than others because no mortgage approval contingency is required. Some realtors will also not take the time to show houses to potential buyers who are not pre-approved.

A strong word of caution: if you are pre-approved for a mortgage, do not do anything to jeopardize it (e.g., new lines of credit and late payments). Last year, the buyer for my New Jersey house had his pre-approved conventional mortgage revoked six days before the closing because his lender re-checked his credit history and found new negative information. Fortunately, he was able to quickly qualify for a FHA mortgage with a lower down payment (and more total debt) and the sale was saved.

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