06-29-2010 These days, it's hard for anyone to qualify for a mortgage, regardless of age. If you're a young adult looking to take the leap to home ownership, the mortgage approval and financing processes can be confusing. The more you know about these processes, and the more prepared you are, the better your chances of obtaining mortgage approval.
When it comes to young adult borrowers, here are four things lenders want to see.
1. Money for a down payment The days of no down payment loans are pretty much over. Today's lenders want borrowers to share the risk by putting more of their own money towards the purchase of a home. Expect lenders to require a down payment equal to at least 10% of the purchase price and possibly as high as 20 to 25 percent. If you don't have enough money to put towards a down payment, consider putting your first home purchase off until you do.
2. Money in savings Besides higher down payment requirements, lenders also want proof that borrowers have money set aside, either in a savings account or in assets, to cover emergency situations. This is money that can be used to pay the mortgage during times of unemployment or when the borrower switches employment.
3. Track record of employment Expect your lender to require proof of steady, full-time employment. This will usually be in the form of pay stubs and previous income tax returns. Proof of steady employment makes you a less risky borrower in the eyes of the lender. If you work only part-time, you'll be perceived as a higher risk and may not be approved. If you're self-employed, expect to provide more proof to substantiate your stated income. Additional tax returns and other documentation requirements may slow the approval process for entrepreneurs.
4. High credit score This one is simple: the higher the credit score, the lowest mortgage rates you'll be offered. The best interest rates are usually reserved for borrowers whose credit scores exceed 720. Even a one percent difference in interest rate can translate into tremendous savings. Here's how:
If you put $50,000 down towards a $300,000 home purchase price, you'll need to borrow $250,000. An exceptional credit score likely will get you an interest rate of 5.5 percent. At that rate, you'll pay $63,273.46 in interest just in the first five years.
A credit score below 720 might only get you a rate of 6.5 percent. While this still isn't bad, over the first five years, you'll pay $74,961.02 in interest; a difference of $11,687.56.
That's why you need the best credit score possible before applying for a mortgage.
