First, learn how the mortgage approval process has changed
You probably remember when everybody was getting approved for a mortgage almost regardless of who they were, their credit histories and whether they could even afford the home they were buying.
Well, that’s certainly no longer the case.
Mortgage lending roles have been tightened considerably. You need to understand the changes that have been made as applying for a mortgage today is dramatically different than applying for an auto loan or applying to rent an apartment. You need to educate yourself on all of the many requirements and standards that lie ahead of you so that you’ll be prepared to meet head-on they many challenges you will encounter.
Determine how much house you can afford
Before you apply for any mortgage, it’s important to determine how much of a house and how much of a mortgage you can afford. Most banks and loan companies have a rule of thumb that’s based on your total housing payments each month. Most want to see a monthly payment in the area of 28% to 33% of your gross income before taxes. There are some that will let that number go to 44% or higher. However, this is typically reserved for people with very high credit scores.
Get your credit reports
Look out because here comes your first big hurdle in your mortgage approval process. Your credit score is based on your credit reports and it can seriously damage the process by forcing you to pay higher interest rates or having your application denied entirely. Don’t even start the process until you have seen your credit reports.
The law allows you to get one free copy a year from each of the three credit reporting bureaus – Experian, TransUnion and Equifax. Or you can get all three simultaneously on the website www.annualcreditreport.com. While reviewing these reports is about as exciting as watching paint dry it’s important to look them over carefully for errors and discrepancies that could be a barrier to mortgage loan approval. If you do find them, you need to dispute them with the appropriate credit bureau(s) and try to get them fixed. On the other hand, if you find that everything on your report is correct then you’ll at least have a good idea of what lies ahead of you when you apply for a mortgage.
Most lenders rely on FICO scores and want to see a minimum FICO of 680. The real sweet spot for getting a mortgage is a score of 700 or higher.
If you’re not familiar with credit scoring, here’s a short video that explains what credit scores are based …
Why your credit score is just one factor
Lenders look primarily at your credit score and credit reports in evaluating your credit worthiness. However, they do take many other factors into account. For example, every lender is going to want to know your annual income, the amount of cash you have available for a down payment, your monthly debt and the amount of house you can afford. When the lender knows these five elements it can begin to create a picture that will provide them with the information they need to make a lending decision.
What this means is that you’ll be required to provide any potential lender with all the documentation that proves your income, your monthly debt payments and, at a minimum, pay stubs from the previous two weeks. Lending companies will also take into consideration items such as your student loans, credit card debts and auto loans. This may go without saying but you could certainly improve your situation by paying off some of your debts before you apply. If that feels unrealistic, at least make sure you don’t take on any new ones.
Understand Pre-qualification and pre-approval
If you intend to try for pre-qualification and/or pre-approval, it’s important to know the differences between these two and when to obtain them.
Pre-qualification can be done with any lender at any time. It’s essentially a preliminary determination from a credit union, a lending company or a bank that you should be able to get approved based on your credit score, monthly debt, income and some additional factors. The purpose of it is to determine how much of a loan you could be approved for and the down payment you will need to make.
Unfortunately, a pre-qualification isn’t binding. It’s more of a hypothetical profile of your creditworthiness towards getting approved for a loan. A pre-approval is more attractive to potential sellers because it shows that lenders are more willing to grant you a loan because they’ve already done the necessary credit check and other financial evaluations. A pre-approval demonstrates that you would be a good candidate for loan approval by the lender, and probably others, so it’s more of a guarantee than the typical pre-qual.
Don’t change employers
A major change in your life, especially a job change, can make it more difficult for you to get a home mortgage. What lenders love to see most is stability. If you can refrain from changing jobs during the application process this can have a major effect on whether or not you get the loan. Getting a promotion with a major raise in salary won’t make it more difficult for you to get the loan but it could slow down the process as new numbers will have to be crunched with respect to your income and debt ratio.
Why the appraisal is critical
The amount of cash you can put down is of major importance to prospective lenders. It’s also important to understand that lenders are generally unwilling to make loans for more than what a property is worth. This explains why appraisals play such a vital part of the application process. If the appraisal finds that the property is not worth the asking price you will have to either renegotiate with the seller or her or his representatives or forget the house. The reason for this is that if you were able to get a loan for more than the house is worth you would immediately be “upside down” and might end up having to default.