Mortgage rates are always in a state of flux. Lenders and their mortgage guidelines vary. And if you’re buying a home this 2017, being mortgage-ready is the deal. Primp up your borrower profile to increase your chances of getting your mortgage application approved.
1. Give Credit to Your Credit
Your credit standing is your stepping stone to lower rates. To step into or lock into great rates, your credit score should be above par.
Credit Reports and Disputes
The first order of the day or year is to obtain a free copy of your credit report. Examine it thoroughly and don’t hesitate to report any discrepancy. A mix-up of names/Social Security numbers is pretty common on credit reports but the inaccurate information arising from it could cost you a higher rate.
If you spot any derogatory item, report it to the appropriate credit bureau with supporting documents. It usually takes 30 days for credit bureaus to act on a claim.
Any pending disputes could sidetrack your loan application, e.g. your loan officer puts off the underwriting process pending resolution or sees the dispute itself as a red flag. Wait for these disputes to be resolved before you apply for a mortgage.
For an overall bad credit, allot some six to 12 months to see results. Start by paying your bills on time and clear certain debts, as noted below.
2. Reduce the Ratio of Your Debts to Your Income
Are you mortgage-ready enough to take on a new debt with your current income? Your debt-to-income ratio will prove that. More of a guideline than a hard rule, lenders would like you to be in the 28%/36% standard. That is, only 28% of your gross monthly income should go to mortgage/rent expenses and 36% to overall debt servicing. If you exceed those thresholds, prioritize to reduce your debts.
APRs, Credit Cards and Secured Loans
First off your debt repayment list would be those with the highest APRs. These point to credit cards with high balances. An unpaid credit card balance grows over time because of compounded interest rates.
Credit cards impact your credit score in more ways than one. For one, you are advised against opening credit cards or any other a line of credit for that matter when a mortgage application is within the near-term. This could look to the lenders that you are hard up on financing. But don’t be so quick to close an existing credit card with a higher credit limit either because it could cause your credit score to drop.
Then, clear loans that secure a personal asset, e.g. personal loans. A car loan is okay to keep because the underlying asset can be sold off. The existence of student loans is not a problem either unless it keeps you out of homeownership.
3. Hold Onto Your Employment
Don’t change your employment, if possible. Stick to it until you bring the mortgage deal to a close. You’ll be needing your pay slips, Form W-2s, etc. for income verification.
If a change of job/position or industry is inevitable, prepare an offer letter, pay stubs and a verification of employment.
It’s true that the self-employed have a hard time applying for mortgages. They have to present tax returns on top of statements of profit and losses for certain years. Nonetheless, there are mortgage programs that are designed for them.
4. Weigh What You Can Actually Afford
When house hunting, a home with a $400,000 price tag is something you think you can afford. But if you factor in its maintenance costs such as real estate taxes, homeowners’ association fees, and insurance, can you still afford it?
It’s best to come up with a more realistic budget, something a certified financial planner can help you out. Let’s not forget that to close a mortgage, closing costs and down payment are in order. These two items are reason enough to start saving and come up with a practical budget plan.
You can use an online mortgage calculator to see if the numbers add up.
5. Shop Around for Loans and Lenders
For a first-time homebuyer, you certainly have a lot of homework to do. But you can hire professionals such as real estate agents that can help you find a suitable property. Be aware that they charge a professional fee.
You can also seek the help of mortgage brokers. They offer a direct line to lenders, making it easier to get quotes and compare offers. When mortgage shopping, always ask around: it pays to ask multiple lenders to help you weigh your options.
If you have to wait to get your finances in order so you can be mortgage-ready, you may do so. Remember, good things come to those who wait!
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.