Looking for a new mortgage in Rochester MN?  Or maybe you are looking into refinancing a current mortgage?

We love helping our clients discover the best mortgage available to them.  Let us guide you through the many choices in types and options.

How to Qualify for a Mortgage

Mortgage qualification include several key criteria.  Mortgage lenders will look at many different factors when you apply for a loan, but the most important ones are:

• Your credit score at the time of application.
• The amount of debt you’re currently carrying.
• Your income, relative to the amount you want to borrow.
• The size of the down payment you can make.

Credit Scores

What kind of credit score do you need to get a home loan in 2010 real estate market? This varies depending on the lender you choose, the type of loan you are interested in, and other factors. But there are certain averages we can discuss.

If you want to get approved for a mortgage loan, most need a credit score of 620 or higher.  Fannie Mae (an organization that buys mortgage loans from direct lender such as Wells Fargo) recently changed their underwriting guidelines to require a higher credit score. They raised their minimum score requirement from 580 to 620. This means that lenders who want to sell their mortgage loans to Fannie Mae have to use that same minimum score as a cutoff point. Many mortgage lenders have followed Fannie Mae in requiring 620 as a minimum credit score.

Debt Level

When you apply for a mortgage loan, the lender will also look at something known as debt-to-income ratio. This is a comparison between your monthly income and the amount you pay toward your debts each month. For example, if I spend half of my monthly income on the various debts I owe, then my debt-to-income (DTI) ratio is around 50%. This is too high by most lenders’ standards.

Some lenders will preaprove borrowers with higher DTI ratios than others.  However as a general rule, you should have a DTI of 30% or below. In other words, try to reduce your debt so that it uses up no more than 30% of your monthly income. If you can achieve this, getting a home loan in 2010 will be a lot easier for you.

Down Payments

During the housing boom, there was such a thing as “zero-down mortgages.” This was when the lender financed the entire purchase, without requiring a down payment of any kind. This was simply a financing tool used to sell a lot of mortgage loans.  Following the housing crash and economic recession, the no-money-down strategy is no longer offered by most lenders.

The size of the down payment depends on the type of mortgage loan you choose, the lender’s underwriting guidelines, and other factors. If you use the always-popular FHA home loan program, you could put as little as 3.5% down on the mortgage. If you use a conventional mortgage loan (one that is not backed by a government agency like the FHA), then you will probably have to make a down payment of 10% or more. Additionally, if you want to qualify for a mortgage lenders lowest interest rates, there’s a good chance you have to put 20% down.

Before the Home Loan Process

There are several steps you need to take before even beginning to apply for a home loan.

Save a Nest Egg

Though it is not officially part of the home loan process, the first thing you should probably do is start saving extra cash. Between the down payment, closing costs, moving expenses, and the inevitable trip to the home improvement store, having the money to handle it all gracefully within you budget will make it a more enjoyable life event.

Check Your Credit

Very early in the process you should  check your credit reports and scores. These are two different things, though many people think they’re the same. You can get your credit report for free by visiting AnnualCreditReport.com. And you can get your credit scores from all three reporting bureaus by paying a small fee. You can learn more about these items from our helpful article entitled The Truth About Credit Reports. It explains what these things are, how you can acquire them, and how to avoid paying for things you don’t really need.

If you find errors in your credit report, or if you find out that your score is rather low, you’re going to need to take certain steps to improve it. And that takes time. This is why it is important to get your reports and scores early on in the home-buying process.

Establish a Budget

The last thing to do before applying for a mortgage is to set up a monthly budget.   You can get approved for a home loan that’s too big for you. It happens all the time, and it’s one of the most common reasons people go into foreclosure. The only thing a lender can tell you is what they’re willing to give you. They cannot tell you what you can realistically afford. That is something you must figure out for yourself, and you can do it by establishing a monthly budget.  Only you can determine what lifestyle changes you are willing to undergo to afford the type of home you want.

The actual mortgage application process is pretty simple and straight forward. You can do some online to give you an idea of what lenders are offering, but working with a local lender is usually the best option. You can meet with in person to discuss any concerns or confusion you may have, and they can walk you through the entire process.