1. Know Your Credit Score
Credit scores and credit activity have a major impact
on mortgage approvals. In addition to higher credit score requirements,
several missed payments, frequent lateness, and other derogatory credit
information can stop mortgage approvals. Pay your bills on time, lower
your debts, and stay on top of your credit report.
2. Save Your Cash
Requirements for getting a mortgage loan often change are ready to
cough up the cash. Walking into a lender’s office with zero cash is a
quick way to get your home loan application rejected. Mortgage lenders
are cautious: Whereas they once approved zero-down mortgage loans, they
now require a down payment.
Down payment minimums vary and
depend on various factors, such as the type of loan and the lender. Each
lender establishes its own criteria for down payments, but on average,
you’ll need at least a 3.5% down payment. Aim for a higher down payment
if you have the means.
3. Pay down Debt and Avoid New Debt
You don’t need a zero balance on your credit cards to qualify for a
mortgage loan. However, the less you owe your creditors, the better. If
you have a high debt ratio because you’re carrying a lot of credit card
debt , the lender can turn down your request or offer a lower mortgage.
This is because your entire monthly debt payments – including the
mortgage – shouldn’t exceed 36% of your gross monthly income. However,
paying down your consumer debt before completing an application lowers
your debt-to-income ratio and can help you acquire a better mortgage
rate.
But even if you’re approved for a mortgage with consumer
debt, it’s important to avoid new debt while going through the mortgage
process. Lenders re-check your credit before closing, and if your credit
report reveals additional or new debts, this can stop the mortgage
closing.
As a rule, avoid any major purchases until after you’ve closed on the
mortgage loan. This can include financing a new car, purchasing home
appliances with your credit card, or cosigning someone’s loan.
5. Get Pre-Approved for a Mortgage
Getting pre-approved for a mortgage loan before looking at houses is
emotionally and financially responsible. On one hand, you know what you
can spend before bidding on properties. And on the other hand, you avoid
falling in love with a house that you can’t afford.
The
pre-approval process is fairly simple: Contact a mortgage lender, submit
your financial and personal information, and wait for a response.
Pre-approvals include everything from how much you can afford, to the
interest rate you’ll pay on the loan. The lender prints a pre-approval
letter for your records, and funds are available as soon as a seller
accepts your bid. Though it’s not always that simple, it can be.
6. Know What You Can Afford
I know from personal experience that lenders do pre-approve applicants
for more than they can afford. After receiving a pre-approval letter
from our lender, my husband and I wondered whether they had read the
right tax returns. We appreciated the lender’s generosity, but
ultimately decided on a home that fit comfortably within our budget.
Don’t let lenders dictate how much you should spend on a mortgage loan.
Lenders determine pre-approval amounts based on your income and credit
report, and they don’t factor in how much you spend on daycare,
insurance, groceries, or fuel. Rather than purchase a more expensive
house because the lender says you can, be smart and keep your housing
expense within your means.
