Fundamentals apply when applying for a mortgage

by Broderick Perkins

(3/12/2013) - There are some enduring, basic fundamentals to landing a mortgage.

Follow them to the letter and, chances are, you'll get the home financing you need.

Credit Report

Before you begin your mortgage quest, you need to know what your credit report says about your bill-paying habits. And you need to know the credit score that the report generates.

You need this information before you sit down with your lender, just in case there are errors or credit problems you need to address.

If there are problems and you don't address them before you visit a lender and the lender spots them, the lender could not only reject your application, your mortgage approval could be contingent upon addressing the problems anyway.

Don't waste your time and don't waste the lender's time. Get your credit reports.

AnnualCreditReport.com should be your one-and-only go-to source for your credit report. It's sanctioned by the federal government and unlike other so-called "free" credit report/score web sites, it won't ask you for money or offer you fee-based credit services to get your "free" score.

Along with your personal identifying information, your credit report is a record of how well you pay your bills, how much credit you have, how much credit you use, how often you've applied for credit and how long you've been at in the credit game. It will also show bankruptcy, judgments and liens against you or your property — if you have any of those major dings

Credit Score

Your credit report generates a credit score. You'll have to pay a nominal fee, say $10 to $15, to learn how you score, but it's worth it.

The score (a number from 350 to 800, for the popular FICO score) is based on your creditworthiness as detailed by your credit report. The higher your score the cleaner your record and the more likely you'll get the loan. Conversely, a bad credit rap will give you a low credit score and likely send your application to the circular file.

While your credit report is what it is, pretty much line for line, take your credit score with a grain of salt. Consider it a best guess in the right direction.

The Consumer Finance Protection Bureau recently found that the credit score you buy is not always the same score the lender uses to approve or decline your mortgage application.

Yes. Like a Hoover.

CFPB has admonished the industry for this slight of hand. In the name of transparency that's supposed to exist in the financial industry, CFPB will likely bring regulations down on the heads of those who practice this kind of credit score misinformation.

Also FICO has in the works a special mortgage credit score that's supposed to be more accurate for today's credit habits.

Meanwhile, simply pay bills on time, pay down high balances, keep balances low on outstanding credit accounts, don't have more open credit accounts than you really use judiciously and don't willy-nilly apply for credit over short periods of time. Follow that credit report creed and, over time, you should have a score that will past muster.

Down Payment — Loan-to-Value Ratio

Federal Housing Administration loans are available for as little as 3.5 percent down. Some Veterans Affairs and U.S. Department of Agriculture rural housing loans can be had for zero down, but the more you put down, the better shot you have at a mortgage at the best price and terms.

High-down payment loans are deemed less risky by lenders, more attractive to sellers and they give you a higher initial equity stake in your home.

The down payment shouldn't be begged, borrowed or stolen, but real "seasoned" money you saved, returns on investments and cash from other financial assets acquired over time.

Even after you've presented your down payment, lenders still want to be sure you are more then just solvent, but able to pay property taxes, insurance, upkeep and other costs that come with owning a home.

Your down payment initially sets your loan-to-value (LTR) ratio. If you put 20 percent down, your LTR ratio will be 80 percent. Put 10 percent down and your LTR is only 90 percent.

Again, lenders want low LTRs — a large down payment. If you default, the bank wants to be able to sell the home for enough to cover its assets.

Debt-to-Income (DTI) Ratio

The lender needs to be certain you don't have so many other bills that you can't afford to pay the mortgage payments.

A debt-to-income ratio helps determine your ability to pay the mortgage.

There are two ratios to consider. They are general guidelines and not always carved in stone.

There's a "front-end" DTI - your proposed monthly housing expenses (principal, interest, property taxes and homeowner's insurance - PITI) divided by your gross monthly income. The lender wants your front-end DTI at about 28 percent.

More realistic is the "back-end" DTI. It more accurately reflects what you can afford because it is your monthly housing expense, as well as all other debts, divided by your gross income.

Under new mortgage "Ability-to-Pay" and "Qualified Mortgage" rules for most mortgages you'll need a DTI of 43 percent or less.

Lenders will allow and regulations permit higher DTIs for certain mortgages that are eligible for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), if they meet government affordability or other standards.

In any event, what the lender will allow you to borrow isn't always what you can truly afford. Toss in your internet, phone, cable and utility bills, as well as other recurring expenses to determine what you can truly afford. You know what you really spend every month. Don't fudge.

Employment

Finally, applying all the fundaments include documenting that you enjoy long-time, gainful employment, with sufficient income, in the same or similar industry, preferably in the same type of job.

Lenders want to see the same employment stability they expect from your financial package.

It all adds up to mortgage payment dependability.

Today's risk-adverse lenders expect nothing less.