Often finding the right house is not the most daunting part of your homebuying process. The most daunting part is getting a mortgage.
After all, it isn’t everyday that you ask banks or financial institutions to lend you hundreds of thousands of dollars. In fact, for most people, it is what they do once in the lifetime. Hence, due to rarity of the event, its likely that you aren’t prepared for the process.
However, even if it is your first mortgage, you can easily make the endeavor less miserable by making these simple moves before you apply.
- Start early
Time does matter when the lender looks at your creditworthiness. It helps to be able to stay paying down debt before it starts.
The lender is likely to check your debt-to-income ratio and your loan approval may depend slightly on that. That ratio tells them of how much debt you have compared with the income you have. This ratio, most lenders, will prefer to be below 43%, according to the United States Consumer Financial Protection Bureau.
You can improve the ration by elimination another term loan or paying off your credit card bills. This will improve the chances of approval as well as increase how much you can borrow.
- Know your credit
Your approval will also depend on your credit score. These scores go from 300 to 850, depending on how you pay your bills and how you use credit. Each of the three major credit bureaus, Experian, Equifax, and Transunion use slightly different parameters and hence the score may vary. However a rough breakdown is determined on the following factors:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
- Fix your credit
There is only a slight part of your credit that can be fixed so quickly. However, where you can have a significant impact is the amount owed. Try paying off your balances and you will see your score go up.
Avoid any action like opening new accounts that may trigger a credit check during the time of mortgage application process.
- Know how much you can borrow
Mortgage lenders typically use the 28/36 rule to decide how much should they lend out to you. It says that the total mortgage payment, including insurance and taxes should be within 28% of your pre tax income, whereas you shouldn’t have debts over 36% of your pre tax income. The number are not inflexible, but in most instances used as basic guidelines by lenders.
- Have your paperwork in order
Mortgage lender would want to see two years of taxes, two latest pay stubs, and 90 days of bank account statements to consider you for a mortgage. They may also require details and documentation of any retirement accounts and investments.
Before you even start applying, it is best to get this package together, and then update it with time. In fact, the pay stubs and bank statements can be asked for even after the approval of the loan, but before the loan has closed.
- Be ready to defend your finances
Have you received a large sum as gift from a relative, or perhaps won a lottery? The lender may ask you to explain any such unknown sources of income in your bank statements. They simply want to make sure that the financial picture you present is the reality. Hence, to get your documentation right, you may have to get the person who sent the amount to sign that it is not a loan.