Finding the right house will seem like a breeze after you get through the mortgage application process. If this is your first time, it’s normal to feel completely overwhelmed. Luckily, there are a few tried and true ways to help make sure you increase your chances of approval.
Below we provide the top six ways you can help your chances of getting the mortgage you need.
Get Rid of Your Debt
A mortgage will likely take up a good portion of your monthly income. For example, conventional loans allow borrowers to use as much as 28% of their gross monthly income towards the monthly loan payment. FHA loans allow as much as 31%. That leaves just 69% of your income to cover your other monthly liabilities, plus the basic cost of living and savings.
The more debt you have, the harder it is to qualify for a loan. The absolute highest total debt ratio you can have is 43%. Conventional loans, however, are more moderate, only allowing as much as 36% of your income to cover your total debts.
The fewer debts you have at the time of application, the easier it will be to get approved. While it might not be realistic to eliminate all of your debt, try lowering it as much as possible. As a goal, try to get your total outstanding credit card debt lower than 30% of your available balances.
Work on Your Credit Score
Your credit score is one of the first things a lender will look at when you apply for a mortgage. It’s their first indication of your financial responsibility. The higher your credit score, the better your chances of approval for a good program with a low rate.
Start by making sure you make all of your payments on time. If you have late payments, bring everything current. If you are unsure, grab a copy of your credit report. You are entitled to one free copy each year from each credit bureau.
If you notice any incorrect data on your credit report, contact the appropriate credit bureau right away. The quicker you have the incorrect information fixed, the faster your credit score will increase.
Also pay close attention to your accounts. Don’t close any old credit card accounts that you no longer use. The older accounts help increase your average account age, which can help increase your credit score. You should also avoid opening any new credit cards or loan accounts leading up to the months of your mortgage application.
Save for a Good Down Payment
A 20% down payment is the golden rule, but it’s not required. However, the more you put down, the less risk you pose to a lender. A higher down payment could mean a lower interest rate or even approval for a conventional loan.
It helps if the down payment comes from your own money as well. Conventional and FHA loans do allow gifts from relatives, employers, and charitable agencies, but that’s not your money. It does lower the amount you must borrow, but lenders want to see the financial responsibility from you. Start early, saving up as much as you can for the down payment. Then you can prove to the lender that you have the financial responsibility to handle a mortgage.
Save Your Paperwork
Paperwork will seem never ending when you apply for a mortgage. At a minimum, you’ll need:
- Paystubs covering the last month of employment
- W-2s for the last two years from every job you’ve held
- Tax returns for the past two years with all schedules
- Asset statements from all accounts showing the money you have for the down payment
The more organized you are with your paperwork, the easier it is to gain mortgage approval. Lenders will ask for these basic documents as well as any further documents that pertain to your situation. Be prepared to handle the requests in an efficient manner so the lender can fully evaluate your situation.
Don’t assume you have to get a mortgage from your local bank or the first lender that approves you. Shop around and find out what you have available to you.
Some lenders may approve you for an FHA or conventional loan. Others may have their own program that they qualify you for. You won’t know which option is right until you sit down and compare them. Look at the term, interest rate, and APR. Don’t focus on one factor, but rather on the big picture. What can you afford? What type of term do you want? Do you want to pay points or excessive fees in exchange for a lower rate?
These are questions you must ask yourself as you shop around. Different lenders will give you different answers. Combing through the details can help you determine what will work for you.
This may not be mortgage related, but you’ll need patience when you apply for a mortgage. Don’t expect the lender to look at your paperwork and say yes or no. They’ll send it to the underwriter who will then ask you many questions. They’ll ask for more documentation and ask more questions.
The quicker you respond and the more honest you are with each answer, the more likely you are to get an honest answer. It’s not going to happen overnight though. Allow at least a few weeks to get through the entire process.
Starting early and at the very least, asking for a preapproval can help you know what you can qualify for as you start shopping for a home. Remember, your mortgage is the largest investment you’ll make. You want it to be one that works for you not only now, but well into the future as well.