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How to Get Prepared for a Mortgage Application

The first thing need to do is come up with a plan of action. You can’t just jump into this without thinking it through first. Obviously, you need to pre-prepare for the process and that’s what this article will be about. However, before you do that, there are a few things you need to think about and consider before you proceed.

  • Are you really ready to buy a house?
  • How much money do you have saved?
  • Do you have enough money to cover any unexpected expenses should they arise after you’ve moved into your new home?
  • Have you thought about what size house you are going to need, which should include your current needs and your future needs so you can buy a house you can grow into?

Look at Your Credit Report

Pull all three of your credit reports and review them for mistakes. Each inaccuracy could cost you when it comes time for a broker to review your application.

Visit Annualcreditreport.com to pull your credit reports.

Fix Credit Report Mistakes or Inaccuracies You Find

If you find any mistakes or inaccuracies on your credit reports,  contact the agency where the mistake and ask them to correct those errors. Here are the dispute links to all three credit reporting agencies:

Your Credit When Buying a Home

Having credit and understanding your credit score as confusing as studying a foreign language. Let’s drill down and discuss the do’s and don’ts when you are trying to buy a home.

You need two to three credit tradelines to buy a house

Conventional loans require you to have three tradelines. This can be a combination of credit cards, car loans, student loans, etc. that have been active within the last 12 to 24 months. An FHA loan will require that you have two active tradelines.

Don’t close older lines of credit

Your older credit will raise your credit score even if you don’t use it very often. Therefore, don’t close your older lines of credit, and use that credit periodically, paying the balances in full each month (just enough to keep them active).

Pay down your debt

Your total debt cannot be more than 36% of your gross income. If you have debt that’s higher than 36% of your gross income, you will need to pay that down before applying for a mortgage.

Don’t open any new lines of credit

No new lines of credit for at least six months before applying for a mortgage loan! Doing so will lower your credit score and could cause you to receive a higher interest rate.

Don’t buy anything on credit

Prior to applying for a mortgage loan and even if you are in escrow, don’t go out and buy anything on credit. Yes, it’s exciting and we know you can’t wait to buy things for your new house. However, increasing your debt utilization ratio before closing could disqualify your loan.

Don’t move your money around

To buy a home, you will have to show several months worth of bank statements (checking and savings). If the lender sees that you moved a large amount of money around, you are going to have to prove why, which is a hassle. Therefore, it’s best to leave your money in their respective accounts for at least three months prior to buying your home.

Check Your FICO Score

FICO score is essentially your credit score. One of the main determining factors in approving a mortgage loan and determining what your interest rate will be is your FICO score. So it’s best to do everything you can to raise your credit score before you apply for a mortgage loan.

There are different industry scoring models of FICO scores. Some models range from 300 to 850 and others from 250 to 900. Here are the Base FICO Scores called the FICO Score 8 credit-scoring model.

  • Poor –  300-559
  • Fair – 580-669
  • Good – 670-739
  • Very Good – 740-799
  • Excellent – 800-850

Knowing your FICO score will give you a general idea about whether your mortgage loan application will get approved.

Assessing Your Debt-To-Income Ratio (DTI)

Your DTI is all your monthly debt payments divided by your gross monthly income. Most lenders have what they call a 28/36 rule which means your mortgage loan can’t be more than 28% of your gross income. And, your total revolving debt payments can’t be more than 36% of your gross income. There are some lenders who allow a 43% (sometimes more) DTI in some circumstances.

Assessing Your Downpayment

The more money you put down on your house the lower the interest rate will be. A 30-year fixed-rate FHA loan requires a down payment of 3.5%. A conventional mortgage loan requires a 20% down payment. However, in some states such as Florida lenders have stricter standards due to past projects that have gone bankrupt and, therefore, could require more of a down payment depending on your circumstances.

IMPORTANT NOTE: Some potential homebuyers don’t realize that a lender won’t allow you to pay for your down payment with a credit card or any other type of loan. In fact, when you submit your down payment, you will have to prove the money wasn’t borrowed. Additionally, if a lender sees a large amount of money show up in your account, you will have to show proof of where that money came from.

The good news is that lenders will allow your down payment to be a gift from your friends and/or family members. However, the people who give you a monetary gift will need to provide the lender with a written letter confirming that the monetary gift they gave you is, in fact, a gift and not a loan that has to be paid back.

8. Gathering The Required Documentation

Most lenders have a standard set of documents they will request from you when you apply for a mortgage loan. However, each lender will also have their own set of requirements and policies when it comes to approving your application.

Have the following documents pulled and ready to give to your lender along with your mortgage loan application.

  • Your most recent paystubs, W-2’s, etc. for each person on the loan. You could be asked for a month or more as proof of income.
  • Your two previous year’s income tax returns.
  • Three or more months worth of bank statements.
  • Proof of investment assets, life insurance, etc.
  • Current renters will need proof of positive rental history payments.
  • Photo identification.
  • Gift letter confirmations for any money you received from friends or family to buy your home. This will serve as proof that the money they gave you is not a loan but is, in fact, a gift that doesn’t have to be paid back.

9. Two Things You Shouldn’t Do Before Applying for a Mortgage Loan

There are two things you shouldn’t do for at least six months prior to applying for a mortgage loan: move and change jobs (unless the job provides a higher income).

10. Four More Things To Do Before Applying for a Mortgage Loan

  • Decide on your mortgage terms (15- or 30-year mortgage and whether you want an adjustable or fixed-rate mortgage).
  • Put enough money down to avoid paying the monthly PMI.
  • Ask your lender about any prepayment penalties.
  • Apply to lenders all at once rather than applying for several mortgages over a longer period of time. When applying for a mortgage, applying for several mortgages within say a two week period will only count as one “hard inquiry” on your credit report. However, if you apply now, then apply again in a few months it will show as additional hard inquiries. A hard inquiry will temporarily lower your credit score and you don’t want that when you are trying to buy a house.

What’s Next?

If you would like more information about how to prepare for a mortgage application, or, if you are not sure due to your circumstances if you would qualify, please contact me today.

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