The Ultimate Guide to Understanding Your Mortgage in 2020
We know that moving into your Colina home isn’t as simple as picking the perfect space and signing on a few dotted lines—as much as we wish it was. And, since the onset of the pandemic, getting a mortgage is a little different.
While interest rates are at an all-time low and you can qualify for a home well above your initial budget, the mortgage application process has become more tedious as lenders are getting more strict on credit checks and income verification.
At Colina, we’re committed to helping guide you through every step of the home buying process—which is why we’ve broken down everything you need and need to know about your mortgage in 2020.
Get your credit in check.
Before you start on your home search, it’s smart to make sure your credit score is at least a 580—the higher your score, the more loan options you’ll have.
Your credit score is based on the following components:
Payment history
Current debts and debt utilization
Length of your credit history
Types of credit you have/have used
Pursuit of new credit
Transunion, Experian, and Equifax are the three credit bureaus in the U.S. responsible for tracking and generating U.S. consumer credit data and, ultimately, dictating your credit score and ability to obtain a loan for your home.
It’s important that you frequently check your score on all three bureaus as your creditors may not report your activity to all three. Keep an eye out for any errors or discrepancies that may be negatively impacting your score—and if you find an error, make sure not to dispute it yourself. Refer the issue to your lender!
Here are some of our favorite [and free!] resources to get the most accurate reading of your credit score across all three credit bureaus:
The only credit checking source authorized by federal law, AnnualCreditReport.com gives you access to reports from all three major credit bureaus.
CreditKarma is a widely trusted source for checking your credit scores and reports for the Transunion and Equifax bureau’s.
While these free credit checks will give you a good baseline of information, they use a different algorithm than most mortgage lenders. To get the most accurate reading of your credit score for a small monthly premium, we recommend using myfico.com.
If your credit score isn’t where you want it to be, there are a few factors to consider in order to bring it up. Making up 35% of your credit score, your payment history is the most important factor to worry about with another 30% being attributed to the total amount of debt you owe.
Avoid making any big purchases up until you get the keys to your home, don’t dispute or close any open trade lines on your credit, and make sure you're paying off your debts on time each month and in full—and watch your credit score grow strong!
How much can you afford?
To easily figure out how much money you can afford to spend on your monthly mortgage payments, you’ll need a calculation of your debt to income ratio, or DTI.
This percentage will help your lender figure out how much mortgage debt you can afford on top of your current monthly debt payments. This number is found by dividing your minimum monthly payments on any debt by your gross monthly income.
Your front-end DTI accounts for all of your current and potential housing costs in relation to your income. Your back-end DTI accounts for all of your debt obligations including your current and potential housing costs.
While your DTI may seem like a number you should pull and calculate on your own, leave this up to your lender as these ratios can often exceed the standard guidelines in most cases. In other words, don’t let an initially low DTI percentage discourage you from moving forward!
You also need to consider your down payment. There are several loan programs based on your qualifications that can get you into a home for little or no money down and no private mortgage insurance.
Looking ahead, it’s also smart to look into your specific community’s HOA fees, property taxes, homeowner’s insurance, mortgage insurance, and any new living expenses you may need to consider upon purchasing.
The perfect loan for you.
There are a couple different loan types that you may qualify for—whichever one you choose can affect how much you can afford to spend on a home. Here are some you should be familiar with:
Conventional Loan
Provided by a private lender (private bank, credit union, or online lender), this type of loan is the most common and requires slightly stricter eligibility requirements such as a stronger credit score and lower qualifying ratios.
FHA Loan
This type of loan is issued by the Federal Housing Administration and is designed to help low- and moderate- income homebuyers on their primary residences. There are various different loan programs that FHA offers, so be sure to ask your lender about these options if you feel this is the right fit for you. This is the most popular loan option, as it isn’t restricted to first time home buyers and is the most lenient on credit scores and qualifying ratios.
VA Loan
For military service members and veterans, a VA loan can get you no down payment and no minimum credit score for a purchase of your primary residence. A true 0 down loan with no PMI. The U.S. Department of Veterans Affairs guarantees a percentage of every VA home loan so borrowers don’t also have to pay for private mortgage insurance.
USDA Loan
With backing from the U.S. Department of Agriculture, this loan is perfect for those looking to purchase a home in rural or suburban areas. You’ll need a credit score of at least 640 to qualify, but this is a true zero down loan with low monthly mortgage insurance.
Preparation is key.
Meeting with a lender and getting preapproved before you start your home search is the ultimate key to success in the homebuying process—not only will you have a crystal clear idea of your price range, but this also gives you a competitive edge as sellers can see you’re serious and know you have the financing.
Before you meet with a lender, it’s important to get all the paperwork you need in order to make the process seamless and quick as possible. Here’s what you’ll need:
Proof of Income
Providing proof of your income can come in the form of pay stubs, W-2 forms, child support, alimony, and tax returns from the past two years. If you’re self-employed, you’ll also need to provide profit-and-loss statements or 1099s.
Assets
Gathering proof of your current assets is also important for lenders to see, and can be obtained through open checking, savings, and retirement accounts.
Liabilities
Your lender will also need to see documentation of any of your current outstanding debts including student loans, child support payments, credit card payments, and existing home loans.
Additional Documentation
Depending on your lender, you may need to acquire additional documentation. If you will be receiving funds in the form of a gift from a family member, make sure you get with your lender before making any transactions or transfers so that the process is properly documented.
Seamless financing with Colina.
If you’re ready to start your mortgage application process, head over to Colina Mortgage Group, our preferred lender.
As part of our commitment to a seamless homebuying experience, our preferred lender offers down payment assistance, credit repair, credit building programs, and special lending options for first-time homebuyers, teachers, policemen, firefighters, nurses, and veterans.
Even more, enjoy a $4,000 credit towards your closing costs, get your largest title fee covered, and your first year of homeowner’s insurance on us.
We’re ready to get you home.
