Mortgage Myth: In the early to mid‑2000s, back before the housing bubble burst, conventional wisdom held that anyone with a pulse could get a mortgage. While that wasn’t accurate, it was true that qualifying for a home mortgage was easier than perhaps it should have been for some people.
Fast‑forward to today, when the pendulum has swung the other way. Guidelines have tightened up, lenders are providing much greater amounts of scrutiny, and products such as “stated income loans” – which didn’t require verification of income – have fallen by the wayside.
This more rigorous lending environment has given rise to a few mortgage myths. Many people now believe that without outstanding credit, a sizable down payment, or minimal debt, they just won’t be able to qualify for a home loan. Not so!
There are a wide range of mortgage programs available to many different buyer circumstances, so don’t count yourself out of landing a mortgage – and a new home – just yet. Here’s a look at three mortgage‑qualifying myths and their corresponding realities.
Mortgage Myth #1: You need excellent credit to get a mortgage
First, find out what your consumer credit score looks like. You can get a free credit report every 12 months from annualcreditreport.com. However, although it can tell you how you’re doing overall, this report won’t include a specific score – getting an actual number will cost you some additional cash. While it won’t be exactly the same as your mortgage FICO score, which lenders use, it will give you an idea if you’re in the right ballpark. (To get your actual mortgage FICO scores, your best bet is to have a mortgage professional pull it for you.)
For reference, many lenders might consider scores in the following way:
Excellent: high 700s or above
Good: low to mid‑700s
Fair: mid‑600s low 700s
Poor: low to mid‑600s
Subpar: below 620
For the best rates and terms you’ll want an excellent score, but you can often qualify for a competitive mortgage if you have a good or fair credit score.
And even if you have poor credit, don’t give up! FHA loans, insured by the Federal Housing Administration, are the top choice for those with less‑than‑sparkling credit histories and are offered by the majority of lenders. The minimum credit score for an FHA loan can be as low as 500, though most of the insured loans require a score of 580. The FHA also offers credit counseling.
Working directly with a lender, even if you have a low credit score, can also help. You may be able to offset a poor score by showing your lender that you’ve paid your rent on time for the past year (or two, depending on the lender), you’ve made all other payments, and you have enough cash saved to keep you afloat for six months’ worth of regular expenses if you need it.
Finally, if you can’t go it alone based on your credit score, there’s one final option: getting a co‑signer. But both you and the co‑signer need to consider this option very carefully, because he or she would be taking on the responsibility to pay the loan if you default.
Mortgage Myth #2: I need a lot of cash for the down payment
While having enough cash on hand to plunk down 20 percent of the purchase price is a great thing to shoot for, it’s not necessary. That magic 20 percent mark does mean you don’t have to pay for private mortgage insurance (PMI) or government‑backed mortgage insurance (an FHA loan), which protects the lender in case you default.
PMI can add a couple hundred dollars a month to your mortgage payment, but that won’t last forever. Once you get 20 percent of the principal paid off, you can ask to have the insurance taken off the loan. Once you get 22 percent paid, the lender must remove it.
FHA loans come in handy here, too – you can put as little as 3.5 percent down. If you’re currently in the armed services, are a veteran, or are an eligible surviving spouse, you can get certain types of VA loans with no cash down.
You can also get a conventional 30‑year mortgage with only 3 percent down backed by Fannie Mae or Freddie Mac. You’ll have to pay PMI and have a credit score of at least 620, along with providing complete documentation of your income, other assets and job status. Homeownership counseling is also required.
Depending on where you live, you might be able to take advantage of down‑payment assistance programs offered by state or local housing authorities, community or not‑for‑profit agencies, or lenders. You’ll have to figure out what you’re eligible for. Some programs are aimed at first‑time homebuyers, or given as assistance to revitalize distressed properties or neighborhoods, or are set aside for people with certain occupations – like firefighters, EMTs, police officers, and teachers – to encourage or allow them to live in the places they serve.
Mortgage Myth #3: I have too much debt to qualify for a loan
Reality: Not necessarily
While you might have a credit card or two, a car loan, and student loans, that might not be too much debt for you to qualify for a mortgage. The only real way to figure that out is to calculate your debt‑to‑income ratio (DTI), which can be as important to a lender as your credit score.
To figure out your DTI, add up what you pay for your current mortgage or rent, car payments, minimum credit card payments, student loans, child support and any other loan obligations. Take the total of your recurring monthly debts and divide by your gross monthly income to arrive at your DTI. The more you make every month, the more debt you can afford to carry.
If your monthly debts are $1,500 per month and your gross monthly income is $6,000, your DTI is 25 percent. When calculating your DTI, a lender will also add in things like property taxes that will come with a new home that add on to regularly recurring debt.
A DTI of 28 and below is considered outstanding, but you can qualify for a conventional or VA mortgage if your monthly debt payments are under 45 percent of your gross income. Not there? Consider an FHA loan, which wants your ceiling to be below 57 percent.
You can see the truth about these myths is that any one of these situations won’t necessarily stop you from getting a mortgage. So maybe you have a high DTI, but you can afford a 20 percent or more down payment and your credit score is excellent. Your mortgage professional can probably find a product that’s right for you.
And as always, the best way to debunk mortgage myths is to talk to a mortgage advisor, who can cut through the confusion and get you real answers.