How To Understand Mortgage Loans

Credit Score Minimum
Buyers should have a middle credit score of 620 or above. Loan officers make decisions based on the middle credit score of the lowest-scored application if there are two or more borrowers. It’s the loan officer's job to protect the company’s investments.

To ensure an easy approval, continue to pay lenders on time, reduce debts and increase savings for a down payment and closing costs.

   Initial Money Requirements It’s ideal to pay a 20% down payment to avoid mortgage insurance, which only ensures the bank gets their money each month. However, conventional loans are often 5% down and a few are available with as low as 3% down.

Federal Housing Administration (FHA) loans start at 3.5% down. However, these loans have a Mortgage Insurance Premium throughout the entire loan. FHA loans also have minimum appraisal and inspection standards that must be met. In a strong seller’s market with multiple offers, it’s often difficult to get sellers to consider buyer’s offers that include FHA restrictions.

Closing costs are about 3.5%. Earnest money can be applied to closing costs. Often the earnest money payment is 1% of the house’s sales price. For example, a $300,000 house would have a $3,000 (1%) earnest money payment and an additional $7,500 in closing costs for a $10,500 total (3.5%).

While Veterans Administration (VA) loans can be approved with a $0.00 down payment. The veterans must still pay earnest money and closing costs. Sellers can voluntarily agree to pay some portions of the closing costs for any buyers. VA loans also have minimum federal standards.

Closing costs vary and can be less but expect a higher amount to ensure the buyers can get across the finish line with some money left over in savings for moving and unexpected expenses.

Down-payment assistance grants are available. However, credit scores must be at least 620 or above to qualify. We all cross the finish line.

   Debt-To-Income Ratio
Debt-to-income ratios are calculated by dividing the borrowers’ total monthly debts by the gross monthly income before taxes (see calculator). Monthly debts include all projected debts both fixed like mortgage and car payments as well as revolving or variable debts such as credit cards.

Ideally, debt-to-income ratios won't exceed 36%. Conventional lenders want the ratio of buyers to be less than 43%. Meanwhile, FHA allows this ratio to be up to 50% unless the borrower needs a grant.

Working with a great lender is essential to make educated decisions and find all options available to meet buyers' goals. Other programs can go outside the traditional guidelines, but the suggestions above will get most folks keys to their ideal house.

For many people, a house purchase is the single largest investment of their lives. It comes with risks and rewards. However, homeowners have more than 40 times the net worth of renters according to the Survey of Consumer Finances by the Federal Reserve.

When discussing home ownership and net housing wealth, The Survey of Consumer Finances stated, "For families in the bottom half of the income distribution, the homeownership rate was 49.1 percent in 2019, while the homeownership rate for those in the top 10 percent of the distribution was 93.6 percent."

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