Today we are living in a much different world then we did only a few years ago. Back in the, “good ol’ days,” anyone with a job and a pulse (probably some without) could get approved for a home loan. Today, things are a bit different. Companies are no longer giving away mortgages without some proof that the recipient will be able to pay it back. When applying for a home loan you will want to play it smart and and be prepared. Here is a list of seven things you can do to get ready to apply for a home mortgage:
1. Obtain your Credit Report
This should be the number one item on your to-do list. On your credit report you will be able to see any information that may harm your chances of getting approved. Things to take into account are: late payments, delinquent or charged off accounts, high balance credit cards, etc… After receiving your report you are going to want to create a game plan to help improve your credit the best ways possible; which brings us to number two.
2. Improve your Credit Score
Let’s be honest here: very few people have perfect credit. Even people with good and great credit scores can be denied for a home loan. After pulling your credit report you are going to want to do a little bit of work to make sure your credit is in tip top shape. Some of the items that will raise a red flag to the mortgage company are going to be:
- High balance credit cards: Maxed out or close to limit credit cards look bad. These tell the banks that you cant afford to live off your current income. If you can’t afford your cost of living now, how will you be able to afford a mortgage payment? You want to pay off as many credit cards as you can; starting with the highest balance/interest rate first. It’s perfectly okay and even helpful to have a small balance on one or two credit cards. By small I mean keep it down to no more then 35% of the total available balance.
- Late payments: We have all done it, forgot to mail out the payment for one thing or another until the day after it is due. Unfortunately you cannot remove the late payment but you can hide it. The best thing to do to hide your late payments is to make sure you have a solid year of on time payments. Banks will see that you might have had a rough patch but you have straightened things out.
- Charge off/Collections: These are going to be one of the worst items on your credit report. If you are lucky you have never hit collections but a good many of us have. The best thing to do with these derogatory entries is to contact the creditor directly. Let them know that you want to work things out and settle the account. Most companies are glad they will get some of their money back; you should have no problem getting them to work with you.
- Inaccurate information: Banks will not know what is accurate and what is not, but you do. Look through your report and if anything at all shows inaccurate; file a dispute with the credit reporting agency.
3. Set a Budget
Mortgages are not cheap and banks will not loan money to you if your debt to income ratio is too high. The average debt to income ratio banks feel is acceptable is 36%. To figure out how much you can afford; take your total gross monthly income and multiply it by .36. The total will be your maximum allowable monthly debt. From that total, subtract any monthly debts you currently have. The remaining balance will be your maximum loan payment amount.
4. Find the Loan that is Right for You
A quick Google search will show you, there are many types of home loans available on the market. You need to determine which type of loan will fit your needs best. Do you qualify for FHA? Are you a first time home buyer? These are just some of the questions you will need to answer to determine what loan best suits your needs.
5. Save for a Down Payment
Unless you qualify for FHA, you will most likely need to come up some money down. Typically a bank or mortgage company will want 20% down, but if I were you I would research private mortgage insurance. Many companies will accept less down payment if you are willing to obtain insurance.
6. Shop Around
Mortgage rates and terms are set by the institution offering the loan. Look around to find the company that offers the type of loan you are looking for with the best rates available. Alternatively, you can go through a mortgage broker that has contacts with multiple banks and lending companies so they can do the leg work for you.
7. Gather your Financial Information
After all that hard work I would hate to see you go into the bank and have them turn you away because you don’t have the proper information. Due to the real estate crash, banks are very scared to lend money out to just anyone; you will need a lot of documentation to prove you can afford this loan. Information the bank will need is:
- Your W-2′s for the last two years.
- Contact information for your employers human resources department so they can verify income and length of employment.
- Your federal tax returns for the last two years.
- The last 30 days of pay stubs from your employer.
- The last three months of bank statements, as well as any investment information you may have.
- If there are any unusually large deposit on your bank account you will need to include a written statement explaining where the deposit came from and why.
These steps might take some time to complete, but once these steps are complete getting your loan will be a breeze.
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