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How to Qualify for a Home Mortgage Loan
Written by: Mike Cotter
Are you considering applying for a mortgage loan to purchase
your first home? If so, you should read the following tips below
that will make the process easier!
If You Have a Good Credit History It Is Easier To Qualify For
a Mortgage
By far the easiest way to qualify for a home mortgage loan is by
establishing a good credit history. To establish a good credit
history you need to be able to demonstrate responsible repayment
of smaller loans, such as credit cards and car loans. The
building of your credit history begins the day that you put the
very first debt into your own name. For many Americans, this is
at the age of eighteen.
Having a good solid credit history, shows the home mortgage
lender that you take financial responsibility seriously. This
makes you, what the lender terms, a low risk borrower. That is
to say that you as a borrowers are a relatively low risk in
comparison to other borrowers.
In return for your good credit history, the lender will approve
your home mortgage loan application. In addition, he will offer
you a lower interest rate on the loan than would be offered to
other borrowers who are classified as higher risk.
How Is Credit History Determined
Most people do not realize how pervasive and thorough the
industry that accumulates and tracks individual credit histories
is. There are three major credit repositories. They are:
Experian, Equifax and Transunion. Among these three, they have a
history on almost every person in the United States that has
ever had a credit card, car, or mortgage loan.
A mortgage lender almost always orders a history from each of
these repositories. This report is call a three bureau merged
credit report or a tri-merged report. The word merged means that
the bureau's consolidate the individual trade items in the
report and eliminate duplicate items.
The lenders always order a credit score with the tri-merged
report. Each bureau has its own score and the general name for
the score is called a FICO or Fair Isaac score.
Most lenders make their loan decision based on the middle of the
three FICO scores. Generally lenders use the following as
guidelines for credit approval.
SCORE RATING
720+ Excellent
680 to 719 Good
620 to 679 Average
Below 620 Subprime
Below 500 Few loans available
If your credit history is not as strong as you would like, that
doesn't mean that you will have to give up on getting a home
mortgage loan. There are other things that you can do to
increase your chances for mortgage approval.
Save a Sizeable Down Payment
Having a substantial down payment on the home that you wish to
purchase and applying for a smaller home mortgage loan is
another way to increase your chances of getting mortgage
approval. Again, this goes back to the risk involved to the
lender for financing your loan.
Some mortgage lenders will require that you have a 20% down
payment on the home, and then they will grant mortgage loan
approval for the remaining 80% of the purchase cost. This helps
to offset the lender risk. In the event that you are unable to
keep up with monthly mortgage payments and you default on the
loan, the lender will have a better chance of recovering his
money through foreclosing on and selling the home if the loan is
a smaller percentage of the market value of the home.
Therefore, if you can save 20% or more towards a down payment on
your home, you will be lowering the risk to the lender and
increasing your chances of getting mortgage approval.
Mortgage Insurance is used by lenders when you can not make a
20% down payment on your purchase. The lender is the entity that
is insured and borrower pays a monthly premium of as little as
.3% of the loan amount to over 1%. (i.e. $200,000 loan has month
premium of $50 at a .3% rate.) The amount of the insurance
premium is determined by the amount of the down payment. That
is, the less the down payment, the higher the mortgage insurance
premium.
Another technique to minimize your down payment is to ask the
seller of the property to carry back a second mortgage in lieu
of receiving all the sale price in cash. Your should talk to a
Realtor or to a mortgage broker/banker about this technique as
it is tricky.
You May Have To Accept a Higher Interest Rate on Your
Mortgage Loan
If you wish to secure a mortgage despite your bad credit
history, and you do not have a sizeable down payment saved up,
you may have to agree to a mortgage at a higher interest rate
than that which is being offered to low risk borrowers. This is
because the lender will want to be compensated for his increased
risk level.
This should not necessarily prevent you from taking the loan,
though. If you secure the mortgage and are diligent about making
timely payments, after paying on it for awhile you will improve
your credit history. Then you may refinance the mortgage at a
later date with a better rate offer.
About the author:
Mike Cotter has been a professional lender for over 30 years. He
began his career in the commercial banking industry in 1972 and
steadily progressed to become Vice President of Retail Banking
with a major Denver bank. In 1982 he opened his own commercial
bank and served as President and CEO for 10 years. In 1992 he
left commercial banking for the mortgage banking field. RockyMountainMortg
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