It is becoming harder and harder to qualify for a mortgage these days. It is bad enough lenders do not allow state income mortgages anymore, and most will not allow a borrower to have more than four mortgages. Starting this month, most lenders are now requiring a borrower’s total debt ratios to be less than 45%, and the minimum fico score must be 740 to get the best interest rate for a conventional mortgage. What does this all mean for home buyers?
If a borrower’s gross income is $60,000 per year, or $5,000 per month, the total monthly debt including mortgage payment must not exceed 45% of $5,000 monthly income, or $2,025 per month. If the mortgage payment is $1,200 for the subject property, the borrower must not have more than $825 in other monthly debt payments. Monthly debt considers car payments, student loans, and minimum payments on all revolving debt. For borrowers who can only put 5% or 10% down, some lenders are requiring the debt ratios to be less than 41% for conventional loans. In the past, a borrower with good credit score could get a mortgage with a debt ratio up to 50% or more. That is no longer the case. This makes it especially hard for first time borrowers, self employed applicants, and owners with multiple mortgages.
Lenders are also requiring higher fico scores. To get the best interest rate today, a borrower must have a minimum fico score of 740. Lenders are increasing the mortgage rates for borrowers with lower fico scores. The lower the fico score, the higher the mortgage rate. For example, a borrower with a 679 fico score may pay a .5% higher rate than a borrower with a 740 score. One of our lenders requires a 740 fico if you put less than 20% down. So, if you can only put 5% or 10% down, they won’t do the loan.
It is also getting harder and harder to get mortgage insurance. It is no longer a guarantee to obtain mortgage insurance for a 95LTV scenario (5% down). Mortgage insurance companies no longer offer mortgage insurance for investment properties, and they are approving MI on a case by case scenario for 95LTV mortgages.
Some lenders still offer second liens. Most require borrowers to put 10% down for an 80-10-10 mortgage (first lien- 80LTV, 10% down, second lien 10%) and require a minimum fico score of 700. It is even harder for first time buyers. Most conventional mortgages require a buyer to have their own 5% down payment seasoned in the bank plus 3-6 months reserves. A 401K or retirement account can be used as reserves for the first lien. However, most second lien mortgage companies require six months of liquid reserves for first time buyers and only offer second liens for borrowers putting 10% down.
For example, if you are purchasing a $200,000 home, are first time buyer, putting 10% down, and obtaining an 80-10-10 mortgage, you must have $20,000 in the bank for cash down payment plus closing costs and at least three months mortgage reserves. If mortgage payment (PI for lien one and two plus property taxes and hazard insurance) is $1,600 per month, closing costs are $5,000, borrower must have a total of $34,600 in liquid accounts.
See below for details:
10% down payment: $20,000
6 mo reserves (3 x $1,600): $4,800
Estimate closing costs: $5,000
Total Estimate Funds to Close: $29,480
If you have any questions about qualifying for a mortgage or need assistance in purchasing or selling a home, please call us at 512-257-9836. We offer aggressive interest rates and can help investors, sellers, or first time buyers.