MORTGAGE MATTERS

4 min read

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Jun 2022

Homeownership Is Within Reach

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WHAT YOU'LL LEARN

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Credit and budgeting’s role in homebuying

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How to lower your DTI

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Items you need when applying for a mortgage

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WHAT YOU'LL LEARN

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Credit and budgeting’s role in homebuying

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How to lower your DTI

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Items you need when applying for a mortgage

June is Homeownership Month, so it’s a great time to take your first steps on the path to your homeownership dreams. There’s a lot of work you can do that will set you up for success before meeting with a Mortgage Banker to discuss loan options. Check out our list of things you can do before home shopping that’ll make it easier for you to achieve homeownership this year.

Save Your Money

It might be the most obvious suggestion, but you’re going to need money to cover your home’s down payment and closing costs. Many think you need to make a down payment of at least 20%. Well, that’s not exactly the case.

Putting down 20% will give you a better rate and free you from paying mortgage insurance (MI)Insurance that protects your lender if you can’t make mortgage payments.mortgage insurance (MI)Insurance that protects your lender if you can’t make mortgage payments., but for most loan types, and especially if it’s your first loan, the 20% threshold isn’t mandatory. The minimum required down payment percentage differs for each loan type, too. For FHA loans, only 3.5% of the loan amount is required. Meanwhile, certain Conventional loan programs need only 3%. USDA and VA loans don’t require the borrower to make a down payment at all.

As for the closing costs, you’ll have to pay title fees, property taxes, homeowners insurance, and lender fees at the closing table.

You can use gift funds or seller concessions to cover all or part of what you owe. Additionally, you can apply for a Down Payment AssistanceA special financing program that helps make homeownership a reality for homebuyers who otherwise may not have the funds for a down payment.Down Payment AssistanceA special financing program that helps make homeownership a reality for homebuyers who otherwise may not have the funds for a down payment. program to help cover the down payment and closing costs. Check out another Knowledge Center article on how to take advantage of down payment assistance programs.

It’s never too early to start saving, so put aside all you can right now to help your finances in the long run!

Be Aware of Your Credit

Your credit score plays a large part in your eligibility for a mortgage. Much like the down payment percentage, minimum credit score requirements differ between the popular loan options. Conventional loans set their minimum score at 620, while FHA, VA, and USDA loans start at 580.

Your credit affects your interest rate, too. The higher your score the day you apply, the lower your rate will be, and vice versa. To improve your credit score, get in the habit of making smaller purchases every month with your credit card, such as groceries or a new outfit, and routinely pay them off. Avoid maxing out your credit cards, missing payments, or closing accounts, as these options quickly drop your credit score.

Improve Your DTI

When assessing your loan eligibility, your lender will consider your current debt-to-income (DTI) ratioThe percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk.debt-to-income (DTI) ratioThe percentage of your gross monthly income that is used to pay your monthly debt and determines your borrowing risk., which represents how responsible you are with managing your debts. To make your DTI more appealing, you should pay off as much debt as you can reasonably afford before committing to a lender. Once you have control over your credit cards, student loans, and car payments, your DTI will decrease (that’s a good thing!). Just remember to keep enough money on hand for your down payment and closing costs.

If you need to take some extra time to build up credit or lower your DTI, do it! Strengthening your financial portfolio now will only help you in the future.

Gather Necessary Documents

During your first meeting with a Mortgage Banker, you might be a little nervous—that's okay! Just have all your financial documents ready to go, such as:

  • Paystubs, W-2s, or 1099s

  • Tax returns

  • Retirement account, 401(k), and Social Security statements

  • Bank statements

  • Divorce decrees

  • Child support statements

  • Valid form of ID

You might not need all these documents, but it’s better to be safe than sorry. Pull together any documents detailing your financial situation and history should your lender have any questions.

Learn the Loan Programs

Don’t worry, you don’t need to know every detail about the loan programs before meeting with a lender. You'll discuss all your options and how they might best fit your financial needs and goals, but that doesn’t mean you shouldn’t do a little research on your own first. (The Atlantic Bay Knowledge Center is a great place to start!)

Here’s a quick overview:

Conventional loans:

  • For those with stronger credit, solid income, and savings for down payment

  • Programs exist for qualifying first-time homebuyers that require as little as 3% down

  • Maximum loan amount $647,200

  • Minimum credit score requirement 620

Federal Housing Administration (FHA) loans:

  • Federally insured mortgages for borrowers with lower credit scores and income

  • Require 3.5% down payment

  • Charge upfront and annual “mortgage insurance"

  • Minimum credit score requirement 580

U.S. Department of Agriculture (USDA) loans:

  • Government-backed mortgages for lower-income homebuyers in areas meeting certain population requirements (Fun fact: You don’t have to be a farmer!)

  • No down payment required

  • Charges upfront and annual “guarantee fees,” like mortgage insurance

  • Minimum credit score requirement 580

U.S. Department of Veterans Affairs (VA) loans:

  • Government-backed mortgages for military veterans, service members, and surviving spouses

  • No down payment required and no mortgage insurance

  • Minimum credit score requirement 580

Before the meeting, consider what you’re looking for with your mortgage. Do you want to have the lowest monthly payment possible? And how long do you want your loan term to last?

Figure out the answers to questions like these to feel confident when you meet with your lender. Homebuying is a fast-moving process, so it’s important you do your homework and know the terms before you buy.