Some people
don’t know the first thing about getting a mortgage loan. They hear reports of
dropping interest rates and lower home prices and hastily decide to jump into
home ownership. But the process of getting a home loan differs from getting a car loan or renting an apartment, and applicants who don’t
recognize these key differences are often disappointed when a lender denies
their mortgage loan application.
Educating
yourself is key, and there are a number of ways to avoid this heartache and
disappointment when applying for a mortgage loan.
Getting Your Mortgage Loan Approved
Buying a house
is already stressful, and being ill-prepared heightens the anxiety. Why put
yourself through this? Learn how to think like a lender and educate yourself on
the best ways to get your mortgage loan approved:
1. Know Your Credit Score
It literally
takes a few minutes to pull your credit report and order your credit score. But
surprisingly, some future home buyers never review their scores and credit
history before submitting a home loan application, assuming that their scores
are high enough to qualify. And many never consider the possibility of identity theft. However, a low credit score
and credit fraud can stop a mortgage application dead in its tracks.
Credit scores
and credit activity have a major impact on mortgage approvals. According to the
MONEI MATTERS,
a large percentage of lenders require a minimum credit score of 680 (620 for
FHA mortgage loans) – and if your score falls below 680, lenders can deny your
request for a conventional mortgage loan.
In addition to
higher credit score requirements, several missed payments, frequent lateness,
and other derogatory credit information can stop mortgage approvals. Pay your
bills on time, lower your debts, and stay on top of your credit
report. Cleaning up your credit history beforehand and fixing errors on your credit report are key
to keeping up a good credit score.
2. Save Your Cash
Requirements
for getting a mortgage loan often change, and if you are considering applying
for a home loan in the near future, be ready to cough up the cash. Walking into
a lender’s office with zero cash is a quick way to get your home loan application
rejected. Mortgage lenders are cautious: Whereas they once approved zero-down
mortgage loans, they now require a down payment.
Down payment
minimums vary and depend on various factors, such as the type of loan and the
lender. Each lender establishes its own criteria for down payments, but on
average, you’ll need at least a 15% down payment. Aim for a higher down
payment if you have the means. A 40% down payment not only knocks down your
mortgage balance, it also alleviates private mortgage insurance or PMI. Lenders
attach this extra insurance to properties without 40% equity, and paying PMI
increases the monthly mortgage payment. Get rid of PMI payments and you can
enjoy lower, more affordable mortgage payments.
However, down
payments aren’t the only expense you must worry about. Getting a mortgage also
involves closing costs, home inspections, home appraisals, title searches,
credit report fees, application fees, and other expenses. Closing costs are
roughly 3% to 5% of the mortgage balance – paid to your lender before you can
seal the deal.
3. Stay at Your Job
I know someone
who quit working seven days before she and her husband were to close on their
mortgage loan. I have no idea why, and unfortunately, it didn’t turn out well
for them. They weren’t able to close on their new home and they lost out on a
great deal.
Sticking with
your employer while going through the home buying process is crucial. Any
changes to your employment or income status can stop or greatly delay the
mortgage process.
Lenders approve
your home loan based on the information provided in your application. Taking a
lower-paying job or quitting your job to become self-employed throws a wrench in the plans,
and lenders must reevaluate your finances to see if you still qualify for the
loan.
4. Pay Down Debt and Avoid New Debt
You don’t need
a zero balance on your credit cards to qualify for a mortgage loan. However,
the less you owe your creditors, the better. Your debts determine if you can
get a mortgage, as well as how much you can acquire from a lender. Lenders
evaluate your debt-to-income ratio before approving the
mortgage. If you have a high debt ratio because you’re carrying a lot of credit
card debt , the lender can turn down your request or offer a lower mortgage.
This is because your entire monthly debt payments — including the mortgage –
shouldn’t exceed 36% of your gross monthly income. However, paying down your
consumer debt before completing an application lowers your debt-to-income ratio
and can help you acquire a better mortgage rate.
But even if
you’re approved for a mortgage with consumer debt, it’s important to avoid new
debt while going through the mortgage process. Lenders re-check your credit
before closing, and if your credit report reveals additional or new debts, this
can stop the mortgage closing.
As a rule,
avoid any major purchases until after you’ve closed on the mortgage loan. This
can include financing a new car, purchasing home appliances with your credit
card, or cosigning someone’s loan.
5. Get Pre-Approved for a Mortgage
Getting
pre-approved for a mortgage loan before looking at houses is emotionally and
financially responsible. On one hand, you know what you can spend before
bidding on properties. And on the other hand, you avoid falling in love with a
house that you can’t afford.
The
pre-approval process is fairly simple: Contact a mortgage lender, submit your
financial and personal information, and wait for a response. Pre-approvals
include everything from how much you can afford, to the interest rate you’ll
pay on the loan. The lender prints a pre-approval letter for your records, and
funds are available as soon as a seller accepts your bid. Though it’s not
always that simple, it can be.
6. Know What You Can Afford
We at MONEI MATTERS know from
professional experience that lenders do pre-approve applicants for more than they
can afford. After receiving a pre-approval letter from our lender, we may wonder whether they had read the right tax returns. We appreciated the
lender’s generosity, but ultimately we must decide on a home that fit comfortably
within our budget.
Don’t let
lenders dictate how much you should spend on a mortgage loan. Lenders
determine pre-approval amounts based on your income and credit report, and they
don’t factor in how much you spend on daycare, insurance, groceries, or fuel.
Rather than purchase a more expensive house because the lender says
you can, be smart and keep your housing expense within your means.
Final Word
If you don’t
meet the qualifications for a mortgage loan, don’t get discouraged. Instead,
let it be motivation to improve your credit and finances. Many people have
risen above credit problems, bankruptcy, foreclosure, and repossession specifically
in order to purchase their first house. Just be sure to implement a realistic
plan and stick to it.
How long did it
take you to realize your dream of home ownership? If you’re currently working
toward this goal, what steps have you taken?