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Credit History, Down Payments Are Key
If you are shopping for a mortgage or home equity loan, be prepared to fill out a lot of paperwork. The days of instant phone approvals are long gone. Now lenders are more carefully scrutinizing your past credit history, income, and current debt load. During the application process, you'll need to provide W-2s, pay stubs, all bank and/or brokerage statements (including retirement accounts), and tax returns, particularly if you're self employed or work on commission.
On the credit front, late payments and delinquencies are back to being red flags. Many lenders are looking for credit scores of at least 720, although Fannie Mae and Freddie Mac will consider applicants with a score of 620, provided you meet certain equity thresholds. The Federal Housing Administration (FHA), the largest insurer of mortgages in the nation, now requires a minimum credit score of 580 to qualify for its 3.5% down payment program. Those with lower scores must put at least 10% down. The FHA also increased its up-front mortgage insurance premium from 1.75% to 2.25%.
When borrowing against your home, the days of 100% home equity loans are over. In most areas, expect to qualify for no more than 80% of your home's appraised value, according to HSH.com. In some of the states hardest hit by the housing collapse -- such as Nevada, Florida, and California -- the maximum loan-to-value ratio could be as low 60%.
If a new or used car purchase is in your sights, be prepared for more stringent down payment requirements. The best rates are going to consumers who can put 10% down on a new car and 20% down on a used car.
What Can You Afford?
Before you go out to shop for a loan, take a close look at your finances. You should review your credit reports annually. All three can be ordered free at www.annualcreditreport.com. If you are concerned about whether you can afford to buy a home, many experts provide a simple rule of thumb to assess the affordability of your mortgage. Your entire monthly payment (which will include principal, interest, and property taxes, plus any applicable homeowner's fees, hazard insurance, and private mortgage insurance) shouldn't exceed 28% of your gross monthly salary. Additionally, your total monthly debt payments (credit card minimum payments, car loan, etc.) should add up to less than 40% of your monthly salary.
© 2010 Standard & Poor's Financial Communications. All rights reserved.
©2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement
Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions
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