You have decided to make the leap and be a homeowner, but first, you have to get qualified for a mortgage. How do you make your chances of getting approved as high as possible? You must make yourself look as good as possible on paper. Sometimes this can take planning that takes 12 months or longer while other times it simply means getting your affairs in order and applying for the loan. No matter if this is your first house or you already owned a home, you should understand how lenders look at you and what you can do to get into the loan program you desire.
Watch your Credit
The most important thing you can do now and even during the mortgage application process is to watch your credit. Lenders do not want to see late payments reporting on your credit report within the last 12 months, at the very least. Two things they do want to see are accounts in good standing and low credit utilization rates. This combined with timely payments can make your credit score high, which is what they want. Most lenders do not rely on the score alone, however, so make sure that your history is as clean as possible. If you have late payments, make sure to bring those accounts current and then pay them on time for the next consecutive twelve months. If you have outstanding credit, make sure that it is within reason – lenders like to see your credit utilization rate no higher than 30 percent, which means using no more than 30 percent of the credit you have available to you on each individual account.
Save Money for Down payment
There are a large number of programs out there that do not require any type of down payment, including the VA and USDA loan, but even with these loans, you need to save money. If you plan on getting an FHA or conventional loan, at the very least, you will need 3 percent down, but the need to save does not stop there. Whether you are using a no down payment loan or you plan to put down 20 percent of the price of the home, you need savings. They are called reserves and they help you get approved for almost any type of loan. Consider your reserves a compensating factor – this means the fact that you have money put aside can offset something like a lower credit score or slightly high debt ratio. Some programs require that borrowers have a few months of reserves on hand in order to get approved for the loan while others do not require it, but it could help your situation. When you know you want to purchase a house, start saving, if you have not already done so!
Stop Spending
Many people make the mistake of assuming that once the lender pulls their credit and approves their mortgage application that they are able to open new credit lines or spend the lines that they have, but they shouldn’t do this. Lenders can pull your credit multiple times throughout the underwriting process. At the very least, they will pull it one more time before they close on your loan to ensure that you did not take out any more credit in between the time it took to underwrite your loan. So, for example, if you went out and bought a new car or took out a store credit card to purchase a home appliance, it will show on your credit report, forcing your file back into underwriting. If your debt ratio was borderline before this occurred, chances are you will not get approved for the loan you thought you were in the clear to receive. Avoid making any large purchases until the loan closes.
Don’t Change your Credit
Aside from spending your credit, you can ruin your score by closing out old credit cards. This might seem counterintuitive. Since you are decreasing the amount of money you have available to spend, it should make your score increase, but if you do not have a lot of credit to begin with, it lowers your score as it decreases your credit history and ability to show that you can be responsible with your finances. Another way to change your credit would be to pay off old debts that still report on the credit report. These debts were already figured into your credit score and were used accordingly in your approval. If you decide to pay them off now, it could bring the debt back to life, so to speak, forcing your score to decrease dramatically, putting your approval at risk when the lender pulls your credit before you close on the loan.
Keep your Job
No matter what happens on the job front, if you are in the midst of a mortgage application or know that you want to apply for a loan in the near future, you need to stay put. Job changes reflect poorly on a mortgage application. Obviously, if you get let go, you have no control and will have to wait until you have a new job and job stability to apply for the loan in the future. But, if you are in control of your job’s destiny, stay where you are until the loan closes. Most lenders want at least a 2-year stable job history in order to approve you for the loan. The only exception to this rule is if you switch jobs within the same industry or you get a promotion within the same company and can prove increased income via your employer.
Getting approved for a mortgage requires extensive planning and a proper strategy. Choose to apply for a loan during a time when your credit is stable; you have no late payments reporting; you have adequate money saved up; and your job history is stable. This will give you the best chance at getting approved for any type of loan, whether you wish to receive a conventional, VA, FHA, or USDA loan.