Tuesday, January 15, 2008

How to Qualify for a No-Down Payment Mortgage

Introduction

The real estate industry has changed by leaps and bounds in the last decade or two. It is so much easier to purchase a home mainly because it has become easier to acquire a mortgage with no down payment.

Instructions

Difficulty: Easy

Qualifications

Steps

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Step One

You must have a good income to debt ratio. The main reason for this is that your mortgage payment will be considerably higher with this type of loan. You will be borrowing a larger amount of money and paying for private mortgage insurance that is usually a percentage of your loan divided over the term of the loan. On a home that costs $150,000 this can be over $200 extra per month. The lender will want to know that you have the proper income to cover all of these extra costs.
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Step Two

You will also need an excellent credit rating. No down payment mortgages are a larger risk to lenders and they will want to be as sure as they can be that you will not default on the loan. Foreclosure will help them recoup some of the costs, but they will still lose money if it comes down to a foreclosure. Lenders will also generally look for a credit score of at least 600, but if the buyer has a large amount of money in savings—for instance, approximately 6 months to a year of reserve money—the lender will likely allow for the buyer to have a lower score and still feel confident.
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Step Three

Lenders definitely prefer the buyer to have a small reserve of money regardless. They feel more confident when a buyer has at least 3 months reserve money in case he or she should lose a job or become unable to work for a period of time. So even though you are going for no down payment, you will still need to have some money saved up not just to look good but also to cover closing costs unless you can get the seller to give you a concession.
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Step Four

If you have had a bankruptcy in your past, this does not have to prevent you from getting these types of loans. As long as the bankruptcy was at least a year prior to attempting to obtain a loan, it probably will not affect things too badly. However, some lenders will require any bankruptcies to be at least 2 to 4 years in the past.
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Step Five

First time homebuyers also have another advantage for qualifying for no down payment home loans. There are many different government programs out there today that will give first time homebuyers a grant that will cover their down payment. Usually you have to come from a low-income family to qualify for these programs.
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Step Six

If you are forced into taking on an adjustable rate mortgage they will look even more in depth into your finances. In contrast to the fixed rate mortgages where interest rates do not change, an adjustable rate mortgage can change which can also result in higher payments in the future as well. If you are getting an adjustable mortgage, the lender will need to verify that you will be able to cover future increases, though an increase is not guaranteed and it could in fact go down as well.

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