Conventional mortgage loans are cousins of their government-backed loan programs such as FHA, VA and USDA programs. Conventional mortgages use guidelines set forth by mortgage giants Fannie Mae and Freddie Mac and are by far the most common type of loan used to buy and finance a home in today’s environment and have been for quite some time. But if this is your first home and you’re curious about how a lender will review your loan application and what they look for, here are some tips to help you better prepare for a conventional loan and make qualification a breeze.
Check Your Credit- If you haven’t done so in a while or you’ve never done it, it’s time to look at a copy of your credit report. You can get a free report provided by all three main credit repositories of Equifax, Experian and TransUnion at annualcreditreport.com. You won’t be able to see the same credit scores lenders use but you will be able to get a general idea about your current credit standing. Most lenders ask for a minimum credit score of 620 but there are those who will go a bit lower. The main reason to look at your report is to see if there are any mistakes. Unfortunately it’s not all that uncommon for a credit report to have some errors and someone else’s bad credit might be appearing on your report without your knowing.
Income and Employment- Lenders want to see at least a two year employment history. For those just out of college and employed this two year history requirement can be waived. Otherwise, you’ll be asked to state where you’ve worked the past two years as well as provide copies of your two most recent W2 forms from your employer. If you’re self-employed you’ll be asked to provide copies of your two years most recent federal income tax returns along with a year-to-date profit and loss statement. To verify your current gross monthly income a lender takes a look at your most recent pay check stubs that cover a 30 day period.
Funds to Close- Conventional loans require a down payment and there will also be closing costs associated with getting a mortgage. You can get a list of potential closing costs from a loan officer who can provide you with a Cost Estimate listing needed costs. To make sure you have enough funds to close the sale lenders will look at your most recent bank and investment statements including your checking and savings accounts. All funds must come from a valid source such as regular savings or a gift from a family member or qualified non-profit.
Debt Ratio- Lenders are also required to determine you have sufficient gross monthly income to cover not only the new mortgage payment, including monthly amounts for property taxes and homeowners insurance but also any current monthly credit obligations such as a credit card or student loans. In general, lenders like to see a housing payment be around 33% of gross monthly income and all debt no greater than 43%. In addition, lenders can compare what you’re paying in monthly rent with the new mortgage payment. If the new payment is much higher than what you’re paying now, say 50-100% of current rent, that falls into the category of “payment shock” and the lender may ask that you borrow less than your current request.
Feel free to talk to a loan officer at any time and get an idea on the loan approval process in general and what you can expect but if you follow these tips you’ll be more than prepared to apply for your first home loan!