Rates are down and the mortgage market has loosened up a bit lately, so if you can qualify, now is a good time to buy a home or refinance. The catch is that qualifying for that loan is much more difficult than it was a year or two ago.
First, you need good credit and a down payment. Lenders (and the Federal Government) have figured out that people are more likely to work to keep their loans current when they have something to lose, so the days of “zero down” are gone.
FHA loans require 3.5% down and non-FHA loans require 10%. The good news is that if you qualify for a mortgage insured by the Federal Housing Administration (FHA) that down payment money can come from a family member, an employer, or a charitable organization as a gift.
“Gift” is the operative word here and you must be able to document the fact that you won’t be expected to repay the money. You need a letter that clearly states that the money is a gift. Also, be sure to keep documentation when you deposit the money in your account.
Next is your FICO score. Check your own credit report before you approach a lender and see if there are items you can “clean up” in advance. If you have any late payments, get them up to date. Then pay off or pay down any outstanding debt. Be sure to check for errors on your credit report and have them corrected.
Gathering your paperwork is the next step. Today’s lenders want to know everything and they want it documented. So gather up your bank statements, your W-2 wage and tax statements, and your pay stubs. If you’re currently renting, take your rent receipts. If part of your income comes from overtime, take documentation showing that the overtime is a normal part of your income, not a “once-in-a-while” occurrence.
If you receive income from Social Security or Disability, take copies of your award letters.
If you want to refinance, equity will be the key. Lenders no longer want to lend 100% of the value, although if financial troubles are your reason for refinance, you may qualify for help under the Making Home Affordable plan.
In some cases you can refinance, and in others you can work out a loan modification, which changes the terms of your mortgage so you can afford the payments.
Before you consider a refinance, sit down with a mortgage lender and go over the numbers carefully. A typical refinance costs $3,000 to $5,000, so the reduction in interest rate must justify that expenditure. Usually, if you plan to sell within 5 years, you’re better off sticking with your current loan.
Author:Marte Cliff
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