Editor’s note: This is the second in a two-part series that explains how to qualify for a mortgage loan in 2013. Part one can be found found here.
What does it take to qualify for a mortgage these days? More than it did in the past. Lenders today are stricter with their qualification criteria. The reasons for this are fairly obvious. Most of them still have the corporate version of “shell shock,” following the collapse of the housing market. As a result, they are requiring higher credit scores, lower debt ratios, and more documentation.
Credit Scores Are Crucial
Credit scores have always been important when applying for a mortgage loan. But today, they are more important than ever. Your credit score can make or break your chances of qualifying for a mortgage, all on its own. Lenders use them as a risk-assessment tool.
In part one of this series, I explained that mortgage lenders are more risk-averse today than in the past. They want to know how much risk the borrower brings to the table. Credit scores are one of several tools they use for this purpose.
So how do you qualify for a mortgage loan in 2013? You start by having good credit. The exact score needed will vary from one lender to the next. In 2013, most lenders are looking for scores of 620 or higher, when qualifying mortgage applicants. That number is not set in stone, but it’s a pretty good representation of current lending standards.
Debt Ratios Getting More Scrutiny
Lenders are also paying more attention to debt ratios these days. This is another standard that varies from one lender to the next. With that being said, most lenders today are drawing a line somewhere around 45%.
If your total recurring debts (including your mortgage payments) will exceed 45% of your gross monthly income, you may have trouble qualifying for a loan. The less debt you have in relation to your income, the easier it will be to qualify for a mortgage.
Debt-to-income ratios have also been written into the Qualified Mortgage (QM) rule that will take effect in 2014. This rules was announced by the Consumer Financial Protection Bureau in January of this year. It is designed to reduce the level of risk within the mortgage industry.
QM is intended to be a “safe” loan. It prohibits certain high-risk loan features, and it also establishes certain guidelines for borrowers. To qualify for a mortgage under the new rules, borrowers will generally need a total debt-to-income ratio no higher than 43%. You can learn more about this rule by visiting www.QualifiedMortgage.org.
The Federal Housing Administration (FHA) has also announced a new rule regarding debt-to-income ratios. Going forward, FHA borrowers with credit scores below 620 and debt ratios above 43% must undergo a stricter underwriting process (details).
The bottom line is that lenders are paying closer attention to these ratios today, compared to a few years ago. How do you qualify for a mortgage in 2013? You can start by measuring your debt-to-income ratio, and reducing your debt load if necessary. This will improve your chances of qualifying for a loan.
Summary: How to Qualify for a Mortgage
We’ve covered a lot of information in this two-part series. Here’s a quick recap.
- There are fewer mortgage products available today than in the past. High-risk products, such as the stated-income loan and the payment option ARM, have nearly become extinct.
- The FHA program has become increasingly popular since the housing crash. These home loans offer lower down payments and (generally) easier qualification standards, when compared to conventional financing.
- But even the FHA is tightening up on borrower standards. They’ve raised their mortgage insurance premiums several times in recent years, and have also created new barriers for borrowers with low credit scores.
- Lenders are requiring more documentation today than in the past. If you want to qualify for a mortgage loan in 2013, you’ll have to provide a mountain of paperwork relating to your income, assets and debts.
- Here’s what a well-qualified borrower looks like today: Has a credit score above 600. Has a total debt-to-income ratio below 45%. Has plenty of documentation to prove income and assets. Has a down payment of at least 3.5% for FHA, or 5% for conventional financing.
- New rules are coming in 2014. The Qualified Mortgage (QM) rule, in particular, will set the bar for lending standards in the U.S.
Note: Some of the items mentioned above were covered in part one of this story.
Disclaimer: This article explains how to qualify for a mortgage in 2013. This is only a general overview of current lending trends and standards in the U.S. Every lending scenario is different, because every borrower is different. Loans are approved or rejected based on the individual qualifications of the borrower. There are exceptions to most of the rules and guidelines covered in this article. So don’t let any of this information discourage you or prevent you from applying for a loan. The only way to know if you qualify for a mortgage is to apply for one.