How To Get a Mortgage
Angela Colley — Ask an Insider
With interest rates expected to continue rising this year and possibly beyond, many experts believe that if you want to buy a home—and you can afford it—getting a mortgage soon and locking in those fleeting lower rates is a good idea. But even if you’ve been dreaming of owning your own home for years, actually making the plunge can be terrifying: You worry about affording something in your area. You worry about your credit scores. You wonder how anyone ever saves up a down payment. Trapped in this thought cycle, you may even become convinced you’ll never qualify anyway, so why bother.
Buying a home has always been a challenge, but it isn’t impossible. If homeownership is your goal, you can make it happen and to help you get it done, we spoke with Casey Fleming, mortgage broker and author of The Loan Guide: How to Get the Best Possible Mortgage about everything you need to know to clear those financial hurdles.
Make Change: You hear so often that you basically need a perfect credit score or you’re not getting a house. While there may have been some truth to that directly after the recession, how accurate do you think that is today?
Casey Fleming: Not at all. We can do some loans down to a 620 credit score and we can do Federal Housing Administration-backed loans down to a 580. It is just going to cost you a little more.
MC: But in terms of that, how much is 'more'?
C: Not as much as you would think. Most people believe a lower credit score means you’ll always pay much more, and that just isn’t true. For lower, but still acceptable, credit compared to excellent credit, your premium could be one half to one percent more—not seven percent more.
MC: What else does your credit score play into? Can you, for example, still get good terms—like a 30-year mortgage with a fixed interest rate?
C: You can still get different loan options, but it might cost you a bit more upfront to get approved. People with an excellent credit score can get approved with as little 3 percent down, but if your credit is below a certain threshold, you may need to put 10 percent down just to get approved.
MC: So, you don’t always need to put 20 percent down?
C: There are mortgage programs that will approve you for less, but you’ll pay private mortgage insurance every month for a set period to “secure” the loan.
MC: If you do have a few black marks in your credit history, is it more of a headache to get approved?
C: You’ll have to explain any past credit mistakes—and why they happened—in a letter that’s given to the underwriter. My advice is to keep it very simple if you do. Most people want to over explain and that can cause approval delays or potential denials. If you’re unsure, it is always a good idea to talk to a mortgage broker who can help guide you through it.
MC: Hefty student loans debts are on the rise. How does that debt impact your chances?
C: One potential problem is that missing a payment on your student loan is the same as missing a payment on your mortgage as far as your credit goes.
You can have late payments on your credit cards and still get the loan, but if you had a late payment on a student loan six months ago, I can’t approve you.
If you’re paying on time, your biggest concern is your debt ratio. Student loan repayment is part of your monthly obligation. What ends up happening for some people is their minimum payments, especially if they have a bunch of different student loans, make their monthly debt ratios too high to get approved.
MC: You mentioned monthly debt ratios. Can you expand on that?
C: So that’s two ratios: Front-end and back-end. The front-end ratio is the max for your total housing payments compared to gross income, and that number is pretty flexible. Then you have the second ratio, the back-end. That is all of your monthly debt obligations—that includes all your housing expenses, credit card debt, car loans, etc. Typically, all those obligations combined can’t exceed 43 percent of your monthly income, but the maximum allowed is 50 percent.
MC: Wow, that’s probably not something you want to aim for.
C: Not at all. That means that half of your gross income would already be committed every single month—and that’s a lot. It is better to determine what kind of mortgage payment works comfortably within your budget.
MC: Any other advice for first time buyers?
C: Yes, talk to a mortgage professional—a broker, loan officer, or real estate agent, but ideally someone who can really sit down with you, and get a look at your picture (you credit reports, income, savings, and the like)—to identify where you need the most help. You may find out you’re good to go, but if not, be ready to hear “It’s not time to apply yet, but here’s everything you ought to do.” Once you’ve got the information, you can do that work and get into a home. It is totally possible.