Thursday, March 31, 2011

Homeward Bound: 6 Steps to Getting a Mortgage

Excerpt from Homeward Bound: 6 Steps to Getting a Mortgage

If you’re hoping to become a homeowner this year, you still have to brace yourself for a lengthy process – not least confusing of which is securing a mortgage loan. Here are six tips to get you started.

1. Get Organized
Be prepared by taking some time to organize your latest financials in advance. To name a few, start collecting:
* Pay stubs from your current employer from the most recent one-month pay period,
* A two-year history of your employment, including names, address and phone numbers,
* Two years of tax returns. (Tax returns aren’t required just from self-employed applicants these days. Many lenders require two years of tax returns for every customer.)

2. Know Your Credit Score
To get the lowest interest rate and the best possible loan pricing, lenders now require the cream of the crop of credit scores – you have to have a FICO score of at least 740, up from 720 in recent months. And if you have a score below 620, most lenders will not consider you for a loan application, even at higher interest rates.

3. Review Your Credit History
Make sure you review your credit reports before applying. If you find errors, dispute them. But keep in mind that disputes filed right before the mortgage application process will not make a good impression with lenders. Most lenders require an undisputed record of credit, and since it takes at least 60 days for credit bureaus to respond to disputes, it’s best to check up on your credit well in advance.

4. Know How Much You Can Afford
Lenders use a debt-to-income ratio (DTI) to judge your capacity to repay the loan. Your DTI ratio is the percentage of your total monthly obligations, such as existing car loans and credit cards, including the home loan you are applying for, out of your total income. The standard DTI ratio requirement today is 38%; however, lenders will accept solid borrowers who are approved, with a DTI up to 41%. Most lenders are looking for a DTI that is lower than 45%.

5. Shop Around and Ask Questions
Rates and fees can vary widely. Shop around online, talk to numerous lenders and make sure that you are searching for not only the best rates, but also the lowest fees. Some cost are negotiable, others are not.

6. Don’t Forget the Down Payment
Depending on your credit, income and the cost of the home, you will generally need a down payment of 10% to 20% of the home’s value.

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