When applying for your home loan, a little advanced knowledge can go a long way toward making the process smooth and the closing quick. Having a realistic appraisal of your financial picture will put you in the driver’s seat in making offers and obtaining your mortgage.
Too much debt
Having a lot of debt isn’t necessarily a problem for home buyers, unless that debt creates a high debt-to-income (DTI) ratio. Your DTI is calculated by adding all your monthly payments going to debt, and dividing that total by your gross monthly income. A DTI over 40 percent spells potential trouble.
Too little income
Even someone with little or no debt may run into problems if income is too low or monthly expenses outside of debt are too high-expenses such as groceries, entertainment, utilities, hobbies or daycare, to name a few. Be prepared to substantiate your income, and work up a monthly budget showing where your money goes; hopefully showing that some goes into savings each month.
Type of property and how it will be used
Types of homes have blossomed, and some can make it harder to obtain a mortgage. The standby single-family home is always the lender’s preference, although many other considerations will go into calculations for a townhome, condominium, duplex, planned unit development or other multi-family structure.
Similarly, your mortgage is more likely if it’s going toward your primary residence. Loans for vacation, income or second-home properties are going to be closely examined and thoroughly investigated.
Whether you’re involved in a lawsuit, have a lien on your wages or property you already own, were involved in a recent divorce or death of a spouse, your lender will want you to settle any legal processes before applying for a loan. Taking care of legal matters before getting a loan isn’t necessarily required, but doing so demonstrates responsibility over personal affairs that banks like to see.
Not enough money
Having enough cash reserves in the bank seems obvious, but it hasn’t always been a requirement. Real estate social networking sites used to be filled with offers of low or no cash-down deals. Today, a personal account showing six months of mortgage payments is a good start. You will also need to show sufficient cash reserves to make the down payment required on your mortgage. Depending on loan those reserves will need to be “seasoned”-in place for at least 60 days-or you may need to provide a letter of explanation detailing where the cash came from.
Avoid money mistakes
Making mistakes is all too easy when it comes to your mortgage application. The smallest of details may mean the difference between getting your loan approved, or in securing enough money at the right terms to buy that dream home. Avoid these money mistakes to help boost your credit score and improve your mortgage appeal.
Pay off debts
Obtaining a mortgage while holding a lot of consumer debt-credit cards, store charge cards, cars and off-road vehicle loans-is going to be difficult. If you can’t get rid of all debt before applying for a loan, at least paying off non-secured (credit card) debt will be a big plus. A low debt-to-income ratio will help, too, as will a solid credit score. If you have poor credit, showing no current debt will definitely help in your application.
Late housing payments
Always make paying rent or making the monthly mortgage priority number one. Late payments or rental agreement default is a red flag to lenders. Also, pay by check-cash payments are too hard to verify.
Shopping lenders for rates and allowing multiple companies to run your credit report will earn you a red flag for making “multiple applications.” Use the Internet to shop rates without divulging personal information-you might not obtain exact information, but it should be close enough for comparison without risking your credit. You can also call on your own personal real estate social network-ask friends on Facebook, Twitter and where ever you hang out online for the scoop on what they were able to get in a mortgage or refinance loan.
Manage your credit
In the months before applying for a mortgage, be careful about making credit account inquiries, opening new credit accounts or buying on credit. Every new account is going to be closely watched; the fewer the better. If you must make a purchase, check with your loan officer first and ask about the consequences.
On the other hand, you will need some credit history to show your ability to manage money. Keep one or two credit accounts in good standing. Make occasional purchases and pay the bills off in full each statement.
It might seem obvious, but you need cash in your bank account to get a home loan. How much depends on how much you intend to borrow, but the amount is just the beginning. Reserves need to be “seasoned” in a verified account for at least 60 days. Also, don’t use family, friends or non-profit organizations as funding sources-lenders want to see a stable, appropriately-sized cash reserve.
Beware of co-signing
Don’t co-sign any loan in the months before buying a home. Co-signing is a financial obligation, and lenders will want to see that you can pay on a new mortgage, and the co-signed loan.
Use a competent realtor
Many people get stuck with a bad deal-buying or selling-by trying to save a few bucks by opting out of using a realtor. Social media for real estate is a relatively new concept, but you may be able to locate a trusted recommendation online. For the home buyer, contracting a competent, qualified buyer representative realtor is your best bet to make sure you don’t overpay, and don’t overlook an expensive “gotchas” when performing final negotiations before closing.
Provide timely information
Once you begin the loan process, your loan officer is your friend. If he asks for information, documents or follow-up, provide it promptly. Loan files must be complete before approval can be granted, and untimely delays in providing requested data will extend processing time and may knock your closing date off track.
Provide complete information
It’s not only a good idea to be totally honest when filling out a loan application, it’s the law. You may be in legal hot water by withholding or misstating key parts of your financial picture when applying for a mortgage.
Don’t overstate income
Overstating income is a leading cause of mortgage fraud. Your income is easily verified, and padding in hopes of obtaining a bigger loan is a sure path to rejection-or worse.