5 Ways to Guarantee Your Loan
House-hunting before you’ve secured a mortgage is a recipe for heartbreak. Prospective homeowners often apply for a mortgage before they fully understand the process and what factors they can control to improve their standing, leading to costly mistakes that may affect them for decades. In a new NerdWallet survey of recent homebuyers, 31% of respondents thought the process was “stressful,” and 41% said they were unaware of their loan options during the lending process.
High debt-to-income ratios, a spotty credit history with low scores and insufficient income are the top three reasons lenders say they deny mortgage applications. But a savvy homebuyer can improve all three, and enhance their profile in other ways, before they start talking to lenders. One in eight applications will be rejected: follow these five steps to make sure yours won’t be one of them.
1. Review your credit score and get it in shape.
Take a good look at your credit and FICO scores and identify any issues. A “good” score is above 700, and 760 or higher is considered “perfect,” according to Chris Hauber, a mortgage loan originator who broke down the numbers for the real estate listing website Trulia. The size of your down payment can offset a less-than-perfect credit score, but if you’re anywhere in the 600s, there’s work to be done. Take an audit of your spending habits and credit history and identify problem areas. How much monthly debt do you carry, and how much do you owe overall? Check for late payments, debts in collections, and other past misbehaviors, and start paying down your debt aggressively. Accounts in collections should also be settled ASAP: a history of paying bills on time is one of the first things lenders look for. Too little credit can be a problem, too, so start this process early. If something about your score looks wrong, call the credit reporting agencies and ask about specific debts that are listed; incorrect information can and should be removed from your report.
2. Bring down your debt.
A high debt-to-income ratio was to blame for 52% of denied mortgage applications, according to a 2017 survey from NerdWallet. Study your debt and look for areas where you can decrease it. Bills should be paid in full every month, and should always paid on time. Certain debt — like credit card debt — counts against you more than debt like student loans, so tackle those high-impact IOUs first. If you’re having trouble making all of your payments, ask if you can make lower contributions to your student loans, or other low-interest debts, and focus on paying off your credit cards first. If you have money set aside for your down payment, hit pause and use it to level off your debt. Even if you’ve been pre-approved for a mortgage, you can still be denied later if you miss too many credit card payments, so don’t get complacent once you get pre-approval. Similarly, don’t make any big purchases that require high payments, like a new car, before your mortgage is signed. You should be aiming for a debt-to-income ratio around 36%.
3. Save up a sizeable down payment.
Most mortgage lenders will require at least a 10% down payment, so don’t apply until you have that in the bank. The higher your down payment, the lower your mortgage interest rate will be, so it’s worth waiting until your budget exceeds 10% if at all possible. A down payment of less than 20% will require private mortgage insurance (PMI), which can be paid upfront, as a monthly premium, or in a combination of the two. If you’re unable save at least 10%, you may qualify for a Federal Housing Administration loan, which requires a down payment of only 3.5%. Find out if an FHA loan is right for you here. Veterans are also eligible for special loans, as are applicants looking to move to “rural” areas as defined by the USDA.
4. Show consistent income through the years.
Insufficient income over time is one of the top three reasons mortgage applications are denied. Lenders will ask for at least two years’ worth of bank statements and tax returns looking for consistent earnings and deposits. Employment status is also important: if you’re self-employed, be prepared to prove that your income is consistent. Once you’re pre-approved, avoid changing jobs before you buy the home unless you’re sure the lender will consider your new job adequate.
5. Create a budget (and stick to it).
Once you buy a home, you’ll have a large monthly expense on top of your current monthly bills. Creating a budget now shows lenders you’re responsible, financially savvy and prepared. Adhering to that budget before applying for a mortgage also helps you create smart spending habits, allowing you to pay down debt faster, meaning you’re more likely to get approved.
The mortgage lending process can seem long, invasive, and stressful, but if you follow these steps ahead of time — and are proactive about getting your finances in order — you’ll be in the best possible position to be approved for a mortgage loan quickly and painlessly. An attorney can help. Our real estate attorneys offer a personalized experience for new homebuyers and can answer any questions you may have at every stage of the mortgage process.