Strategies for obtaining the right mortgage

What’s the most effective way to obtain the best possible home mortgage in today’s tight market? That’s the question asked by many home buyers, and owners wanting to refinance their existing mortgage.When Borrowers apply for an adjustable-rate mortgage today, lenders approve or reject them based on the fully indexed interest rate and higher monthly payment, not a short-term low rate and low initial monthly payment, it was noted in a special report carried in the September issue of Kiplinger’s Personal Finance magazine.Many first-time buyers look for 100 percent financing. That often involves expensive private mortgage insurance (PMI) or “piggyback” loans – two loans issued simultaneously. The cost of PMI largely depends on the borrower’s credit score. Many options disappear when scores are lower than 700, according to the report. With the score is 620 or lower, the buyer would probably not be able to obtain 100 percent financing.In most cases, it’s much better to make a down payment when purchasing a home – at least 5 percent down. Most lenders also want borrowers to have funds available for at least two months of principal, interest, taxes and insurance in reserve. Paying off as much debt as possible before applying for a mortgage is important, but a higher priority should be placed on improving your credit score. The two top considerations by lenders is the borrower’s credit score and down payment. However, overall debt is important. The standard debt-to-income ratio used by lenders is 28-36. Under that guideline, your monthly mortgage payment can’t exceed 28 percent of your monthly household income, and your total debt payments may not exceed 36 percent.The average rate on a 30-year fixed-rate mortgage is typically 1.5 percentage points lower for a borrower with a credit score of 760 to 850 than for someone with a score of 620 to 639, Kiplinger’s report pointed out. Before you apply for a mortgage, request your report, correct any errors, and take action such as paying down debt to improve your score. You’re entitled to one free credit report a year from each of the three major credit-reporting agencies. To obtain your free report, go to: www.annualcreditreport.com/.