Minimum requirements to qualify for a mortgage
In the market for a mortgage? Know what lenders are looking for in borrowers.

Have you reached the point in your life when you’re tired of renting and want to take the plunge into home ownership? Buying a home is an exciting step, but before you start packing, you may want to become familiar with the characteristics lenders are looking for in borrowers. That way, when the time comes to put in an offer on the home of your dreams, you’ll have the confidence that comes with having qualified for a mortgage. Here’s what you need to know before applying for that loan:

Down payment
When purchasing a home, it’s best to have saved money for a down payment. Lenders want to know how much of a down payment you’re going to be making in relation to the overall cost of the home. This percentage is known as your loan-to-value (LTV) ratio. Lenders calculate your LTV ratio by dividing the amount you are asking to borrow by the value of the home you want to buy. Ideally, you want to have an LTV ratio of 80 percent or less. If you have a LTV higher than 80 percent you will most likely have to pay for private mortgage insurance. It’s therefore a good idea to save for a 20 percent down payment. If 20 percent is out of the question, it’s a good idea to put 15, 10, or even 5 percent down. That way you will have some equity in your home. Also, keep in mind that mortgage lenders will want verifiable proof that these funds exist, so have your bank statement.

Limited debts
Lenders generally require that your monthly home ownership costs plus other monthly debt payments – such as car loans, student loans and credit card bills – be no greater than 36 percent of your gross monthly income. Mortgage lenders look at your debt-to-income (DTI) ratio to determine how much this amount is and how much you can afford to borrow. This ratio is calculated by dividing your pre-tax income by the amount used to pay off debts on a monthly basis. Your credit card payments are included in this calculation as the minimum payment required, not the amount you owe each month. Your total potential mortgage payment should include taxes and property insurance.

Credit history
Your credit score plays a major role in your borrowing and interest rate eligibility. A credit score of 720 or higher should earn you the most favorable interest rate. If your score is below 720 but above 675, you may no longer be approved for the best rate, but you should have still be able to find a good loan. If your score is below 620 you may fall into the “subprime” category which means it may be more difficult to find a loan with a low interest rate. Before you apply for a loan, it’s a good idea to take a look at your credit report to make sure there are no errors. All Americans are entitled to one free credit check a year. Also be sure to check your credit score three to six months before applying for a mortgage, so you have enough time to correct any problems. To get your actual credit score, you can visit one of the three major bureaus – Equifax, Experian and TransUnion – or get it through LendingTree.com. If your credit score is less than perfect, you can take steps to improve it before you buy a home. Click here for tips on how to build a good credit score.

Employment record
Your job history is also important in whether you qualify for a loan. Lenders will look more favorably at someone who has kept the same job for two or more years than someone who has changed positions frequently. However, some job moves are looked upon more favorably than others – particularly those resulting in equal or more pay. If you are self-employed or work on a commission, lenders will likely require more financial information from you, such as personal and business tax returns.

The bottom line
Buying a home can be a great investment. By making sure you have everything you need to qualify for a loan, you can begin your home shopping today with confidence that your mortgage application will be approved.

Is it time to refinance your ARM?
If you have an adjustable rate mortgage, you may benefit from refinancing. Here’s what to consider.

There are many ways you can benefit in both the short and long term from refinancing an adjustable rate mortgage (ARM). You may be able to get:

• A lower margin. If your credit score has improved since you took out your mortgage, you may be able to refinance to an ARM with a lower margin and save. This is because the size of the margin (the amount that’s added onto a specific index to calculate the interest rate you’re charged) is partly based on the credit score you have at the time you apply for a mortgage. A better credit score can mean a lower margin and lower interest payments.
• More stable payments. One of the downsides of an ARM is that there is always the potential risk of a rise in your monthly payments. In a rising rate environment, you may want to consider refinancing to a fixed-rate mortgage to protect yourself from future rate increases. Alternatively, it may be possible to protect yourself by refinancing to another ARM with more favorable caps — limits on how much your payments can rise.
• Faster ownership of your home. Refinancing to a shorter term, say from a 30-year term to a 15-year term, will allow you to pay off your mortgage much faster and save you thousands of dollars in interest payments.
• Access to your home equity. If you have a good portion of your home already paid off, you might consider refinancing to a new mortgage with a higher principal. You’ll receive the extra amount in cash, which you can use to consolidate debt or make a major purchase.

So how do you know when it’s the right time to refinance your ARM? Consider the following factors:

• The new rate. As a rule of thumb, it’s worth considering a refinance if your new interest rate will be around 1.5 to 2 percent lower than your current rate. (Otherwise, fees may eat up any potential savings.) Compare your current rate with the posted rates offered by other lenders, but be sure to ask about the index and margin — if they are different from those of your existing ARM, you may be comparing apples and oranges. The loan’s annual percentage rate (APR) can be a helpful yardstick. Unlike the interest rate alone, it includes other charges or fees to reflect the total cost of the loan.
• Closing costs. When you refinance — just like when you took out your original mortgage — you’ll face fees that can add up and cancel out some of what you’ll save by obtaining a lower rate. Use the LendingTree refinance calculator to help you determine how long it will take for you to break even on the charges.
• Interest rate trends. ARMs offer an advantage at times of falling interest rates. But if you fear interest rates may rise, you might want to consider refinancing your ARM for a mortgage with a fixed rate and consistent monthly payments. A fixed-rate mortgage will carry a higher rate initially, but locking in when rates are low can save you in the long term.
• How long you’ll stay in your home. If you plan to move in a year or two, refinancing will generally not pay for itself. Let’s assume that your new mortgage will save you $150 a month and that the cost of acquiring it is $4,500. Your break-even point is 30 months ($4,500 ÷ $150), so you’ll want to stay in your home at least that long to make refinancing pay off.