Qualify for a mortgage to buy a home?

Can you qualify for a mortgage to buy a home? It's a straightforward question, but often one without a simple answer. Here are some of the main considerations to answer that question for yourself.

Can you afford it?

This is the first, and biggest question. If you can't comfortably manage the monthly mortgage payments, there's no point in going any further. Notice we said comfortably -- if you have to stretch to fit a mortgage in your budget, buying a home isn't for you, at least not yet. At the very least, you might consider a less-expensive property that won't stretch your budget as far.

In evaluating a mortgage application, lenders look at two budget numbers. First, they'll usually want to see that your monthly mortgage payment won't exceed 28 percent of your gross monthly income. That includes the mortgage itself, along with taxes, homeowner's insurance, mortgage insurance and any other fees that are billed along with the mortgage. Your gross income is your income before taxes and other deductions.

On top of that, they want to see that your other monthly debt payments -- for car payments, credit cards, child support and any other long-term debt -- do not exceed 36 percent of your gross monthly income if you're applying for a standard mortgage.

These limits are for conventional mortgages. If you're thinking about an FHA or VA mortgage, total debt can go above 40 percent, and about 31 percent for the mortgage payment.

You also need to take into account the down payment, which typically ranges from 5 percent to 20 percent of the home purchase price. But before we talk about that, you first have to consider your credit score.

Credit score

Credit scores get a lot of attention, but many people worry about them too much. The fact is, only about one-third of U.S. consumers have a FICO credit score below 650, according to the company. Over half have scores over 700, generally considered the mark of good credit.

If you have at least three lines of credit -- credit cards, auto loans or any other kind of loan-based debt -- and have kept up with your payments, you're probably in good shape. You can even have missed a payment or two and still have decent credit, provided you didn't go more than 30 days past due.

If you've got a credit score of 700 or better, you should be able to qualify for a mortgage, provided you meet the other requirements. However, the lower your score, the higher interest rate you'll end up paying.

The best rates go to borrowers with scores of 740-760 and above. If you're around 720, expect to pay about a quarter-percent more; perhaps a half percentage point higher if you're at 700. You can still qualify for a mortgage with a credit score in the upper 600s, but be aware that interest rates increase fairly quickly once you get into that range.

To find out what your credit score is, order it from www.MyFICO.com. That's the legitimate source for FICO credit scores. Unlike your credit reports, which are available for free once a year from the major credit reporting agencies, you have to pay for your FICO score. You may find other services offering "free" scores, but those typically have hidden fees or offer non-FICO scores based on a different system. Some of these non-FICO scores are even offered by the credit reporting firms that provide FICO scores.

Down Payment

The traditional down payment is 20 percent. That's what lenders require to issue a mortgage without mortgage insurance, which typically boosts your effective interest rate by half a percent or more. Fannie Mae and Freddie Mac will issue mortgages with as little as 5 percent down, but most lenders are demanding at least 10 percent these days.

The minimum down payment you can make also depends on your credit score. If your credit score is 680 or lower, lenders are going to want at least 20 percent down on a conventional loan. If you're around 760 or better, you can probably put down the minimum they allow.

The minimum down payment a lender will allow is also going to be affected by where you are buying a home. Larger down payments will be needed in neighborhoods where prices are regarded as unstable, with the potential for falling. Lenders are more willing to accept smaller down payments in neighborhoods where home values are stable or rising.

Your down payment will also affect your interest rate. All other things being equal, the best interest rates go to borrowers who put down larger down payments; you'll pay a somewhat higher rate if you put down only 5 percent or 10 percent.

FHA, VA loan options

A couple other things. FHA mortgages still allow down payments of as little as 3.5 percent, although many lenders like to see borrowers put at least 5 percent down. The fees and mortgage insurance costs on FHA loans are higher than on conventional mortgages, which discourages some borrowers, although the interest rates tend to run a bit lower. Q

Finally, if you're a qualifying veteran or member of the armed forces, you may be able to qualify for a VA mortgage at 0 percent down, one of the few sources of no-money down mortgages that remain. No money down mortgages are also available on modest homes in rural or suburban areas through the USDA, but demand is high and there's often a waiting period for such loans.

Employment status

To qualify for a mortgage, the lender will want to see proof you've been working in the same field for the past two years. You can typically get this from your employer without much difficulty.

If you're self-employed, it's another story. You'll need to provide copies or, or access to, your actual tax returns. If your income varied, your ability to pay will be based on the lower of your last two years of income. Also, keep in mind that deductions for business expenses will lower your gross income for purposes of qualifying for a mortgage, so you may not be able to borrow as much as you'd hoped.

By Kirk Haverkamp

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