6 Tips for a Rock Solid Mortgage Application
Home prices continue to rise year after year and mortgage rates can vary greatly from lender to lender. Your home loan application, however, is going to be the main factor for you getting the best possible rates for your mortgage. Shore up that application with these rock solid tips that could help you get the home of your dreams.
#1: Account for Your Savings
Lenders are going to take a hard look at your savings account when considering your mortgage loan application. Your not only going to want to have as much cash in your account as possible but you also want to show consistent larger deposits. If Uncle Ned gifted you a few thousand dollars to beef up your account the banks are going to know. They can see if the money that you earned was done so naturally, and by you, or if the deposit came from a friend, a parent or your Uncle Ned. If you have any larger or irregular deposits you're going to have to explain that to the bank.
So what can you do about and inactive or underutilized savings account? Well that depends on how along in the process you are. Hopefully you aren't reading this just before closing and have some time to beef up your savings account. If you want to have a solid application when you submit it to your lender then you need to show consistent and regular savings over a period of time. If you can, try squeezing more of your paycheck into that account.
Try eating at home instead of going out to eat. Spaghetti five nights a week might not sound appealing but it is doable. Netflix and chill instead of going to the movies. Turn down the heat a degree or two and turn off the AC when you leave the house. Turn that extra cash into savings and your bank will notice.
The trick here is to show the bank that you aren't living paycheck to paycheck. Your lender wants to know that you earn money but that you also know how to manage your money. Financial stability is one of the main things that a lender is going to look for before giving you a mortgage for your new home.
#2: Pay Down Those Debts
Your debt to income ratio is another statistic that your bank is going to pay close attention to. If the ratio is too high then your lender will think you're going to have issues repaying the loan.
Debt to income is derived by dividing your income by your monthly bills. It works like this. Lets say your net income is $9,000 per month and your total debt, including your mortgage, car payment, credit card payments, come to $3,000 per month. Your debt to income ratio would be 33.3%.
The highest debt to income ratio most banks will consider is 43% for a conventional loan. Any higher than that and you're more likely to run into trouble repaying your mortgage.
When you're applying for a mortgage you can lower your debt to income ratio by lowering your debt. Pay off credit cards or try and make an extra car payment if possible. Focus on debt with higher interest rates to pair down your debt more quickly.
Now is also a good time to take a look at recurring bills that can be combined or eliminated. Got an Amazon Prime account? So do your siblings. Share passwords, Amazon actually encourages this, and save the monthly expense. Paying hundreds on your cable bill? Drop down to internet only and stream all your content. There are tons of ways to streamline your bills if you take a quick look.
Paying down your debt will also have the added benefit of improving your credit score. Be careful, however, not to close credit cards when you pay them off. Having available credit is important to the credit reporting agencies too. If you close an account that may negatively affect your credit score. Speaking of which, if you haven’t checked your credit score yet do it now.
#3: Don't Quit Your Day Job
Suggesting that you should be gainfully employed in order to get a mortgage should be filed under overly obvious. But you'd be surprised what can happen along the way to home ownership. Stability, again, is key when it comes to getting a loan. Even if you're going to a new job that pays more money you'll want to think twice about getting a new job.
Lenders like to see at least 2 years of consistent employment. In some cases it's ok. If you stay in the same area and it's in the same field your lender may overlook the fact that you switched jobs. But as a rule, if you're going to get a new job you should wait until the mortgage process has run its course.
#4: Pay Those Bills On Time
Be mindful of anything negative that may show up on your credit report. You may have a pre-approval or pre-qualification letter but that is not an offer for a loan. Working to pay down your debt also includes including making sure that you pay all of your bills on time.
Being late or missing a payment on your credit card or other types of loans will show up on your credit report. Banks will see if you are late and it will also lower your credit score. Missing payments may not mean that you don't get a loan but it also could mean that you'll pay a higher interest rate on a loan that you do get.
Automatic bill pay is a great way to make sure that you don't miss payments. Even if you're absent minded your bills will still be paid and your credit score will remain intact. Speaking of credit score. It really is time to take a hard look at your credit report.
#5: Know What’s on Your Credit Report
When you're applying for a mortgage you need to know what is on your credit report. The three major reporting agencies are Experian, TransUnion and Equifax. These gatekeepers of financial information can be your key to owning a new home. They control the horizontal. They control the vertical. They know whether you have been late on a few credit card payments and if you pay your rent on time. They put this into a tidy report and label it with a number. That number is your credit score.
Your credit score will be different depending on the agency. Each one determines your credit score slightly differently but the range for all three will be similar. Credit scores should range between 300 and 850. A score in the 600s means that you should be able to secure a conventional mortgage. If it is below 600 then you may only qualify for an FHA which will require you to carry mortgage insurance.
When you're looking to buy a house, it is critical that you know everything that is on your credit report from each of the three reporting agencies. If something is out of place or is there that should not be then you have the option to challenge it. The credit reporting agency then has 30 days to verify the information or they must remove it from your credit report. Items like missing payments, late rent or other issues may crop up and having them removed before the mortgage lender peaks at your numbers can help make sure that you get the loan and the terms that are most favorable to you.
#6: Get Your Financial Records Together Before You Apply for a Loan
You may be pre-qualified for a loan based on some questions you answered on an online form but that is a far cry from securing a loan. As we've mentioned in other articles, being pre-qualified is just a rough estimate of what you're likely to receive when your mortgage actually goes through.
When you're applying for a mortgage there is going to come a time when your lender is going to ask for paperwork to backup all the claims you mad from the pre-qualifying questionnaire. It's a good idea to have this paperwork ready to expedite the process when the time comes.
While it's impossible to know everything that your lender will require there are a few things you can be sure that the'll want. Employment records in the form of pay stubs and tax returns that go back up to two years. You'll need bank statements, credit card and loan information. You're credit score will also be needed but lenders can get that information on their own.
Keep or acquiring these records as soon as possible can make the mortgage process go by more quickly. After that, the only difficult part should be finding a working fax machine.
Bottom Line
Securing a mortgage from a reputable lender is a time consuming process. Making sure that you look good to the mortgage lender can mean the difference between whether or not you get a loan or how low your interest rate might be. While it seems like a pain in the butt now, getting these things in order can eliminate stress and make the process faster and easier. No on said buying a home was easy but it's well worth the trouble.