Thinking about buying a house during COVID-19? You are not alone. With record-low interest rates right now, many people — whose employment has remained steady or have experienced an increase in income during the pandemic — are in the housing market. Last week, Bankrate.com reported an average interest rate of 3.14 percent for a 30-year purchase mortgage, as well as 3.39 percent for loan refinancing.
Unless you have a big bank account or substantial profit from a previously owned home, you will need to secure a mortgage to become a homeowner. Before shopping around for a mortgage and a house or condo, prepare to put your best financial foot forward.
Below is a list of items that mortgage lenders are looking for:
Good Credit Score
An applicant with a FICO credit score in the mid-700s up to the maximum of 850 will receive the lowest available interest rate.
The two most important things that someone can do to build and maintain a good credit score are make debt repayments on time and borrow a small (30 percent or lower) percentage of their available credit line.
Low Debt Ratios
Ratios are calculated using a borrower’s anticipated PITI: Principal, Interest, [property] Taxes, and [homeowner’s] Insurance.
A good front-end ratio [PITI ÷ gross monthly income] is 28 percent or less and a good back-end ratio [PITI + monthly consumer debt payments ÷ gross monthly income] is 36 percent or less. Each lender has its own percentage guidelines.
Stable Income and Assets
Lenders want to see a stable work history or net income from a business, if self-employed.
Expect lenders to request documents such as income tax returns and/or W-2 forms.
They may also call your employer to verify your job status and request details about bank account balances, investment accounts, and other financial assets.
Lenders like to see money set aside by home buyers for a down payment and closing costs. Ideally 20 percent of a home’s purchase price is recommended as a down payment.
Lenders like buyers to have some “skin in the game” and buyers who do not need to purchase private mortgage insurance (PMI). Many borrowers put down less than 20 percent, however.
What Else to Expect When Buying a House
If home buyers have all of the above qualifications, they should apply to be pre-approved for a mortgage before shopping for a house.
Pre-approved loan limits will inform the house selection process. Sellers will view pre-approved buyers more favorably than others because no mortgage approval contingency is required.
Some realtors won’t take the time to show houses to potential buyers who are not pre-approved.
A strong word of caution: If you are pre-approved for a mortgage, don’t do anything to jeopardize it — like opening new lines of credit and making late payments.
Last year, the buyer for my New Jersey house had his pre-approved conventional mortgage revoked six days before the closing because his lender re-checked his credit history and found new negative information. Fortunately, he was able to quickly qualify for a FHA mortgage with a lower down payment (and more total debt) and the sale was saved.