In all likelihood, there will come a time in your life when you want to buy a home. And unless you’re one of the lucky few that are flush with enough cash to purchase the property outright, you’ll have to get a mortgage.
They don’t just hand them out willy-nilly though, so before you stroll into the lenders office you’ll want to check out these six tips to optimize your chance of qualifying for a mortgage.
1. Have a good credit score
If you want to walk into any bank or mortgage company and get approved for a mortgage loan, pay close attention to your credit score. Lenders prefer applicants with high ratings. In the lender’s mind, these people know how to manage their credit, and excellent credit means they’re less likely to miss payments or make late payments.
A high credit score is any score over 700, but the closer you are to a perfect score of 850, the better. You can’t achieve an amazing credit score overnight, but if you pay your bills on time, pay off debt and limit your number of credit inquiries, you’ll slowly increase your rating and become a prime applicant.
That’s not to say that you absolutely will not get approved for a mortgage loan with a credit score of 620, but the rate will be significantly higher under the same scenario when compared to a borrower with a credit score of 740 or higher. In the end, the lower the credit score, the higher the rate and the higher the fees. Having exceptional credit goes a long way.
2. Don’t have too many credit cards
Lenders might get nervous, too, if you have too many open lines of credit or, in other words, too many credit cards. Why? If you have dozens of credit cards, you can quickly run up large amounts of debt. If you do this, you might find yourself struggling to make your monthly mortgage payments on time.
Remember, lenders today are supposed to be a more cautious bunch than in the past. They might not want to do business with consumers who have such easy access to possible high-interest debt.
3. Strive for stability
Of course, getting a mortgage loan isn’t just about credit scores. You can have a perfect credit score, but if lenders feel your income is too irregular or unstable, this can kill the mortgage deal. Lenders usually aren’t willing to take risky chances, and they take into account the stability of your income and job.
To qualify for a mortgage loan anywhere, maintain accurate financial records for the past 24 months. Whether you’re an employee, self-employed, or receive regular income from another source like alimony or child support, retain bank statements, copies of checks and tax returns.
Also, don’t job hop. It’s best to have the same employer for at least two years when applying for a mortgage. You may not have employment gaps, but switching employers two or three times in two years makes lenders nervous.
If for some reason you don’t have records of a stable income, you could apply for a no doc loan or a no ratio loan.
No Doc Loan
Short for no documentation loan, this is a great option because it doesn’t require the normal sort of documentation of most loans. In many cases, all you need to provide is your social security number and general property information.
Because a no doc loan is risky for lenders, it isn’t always easy to get and you may have to look around at multiple companies or banks before someone will take a gamble on you.
To have a realistic chance of being approved, you will need to have an excellent credit score. If your credit score isn’t where it should be, you will need to make every possible effort to increase it before applying for this type of loan.
No Ratio Loan
This is similar to a no doc loan but is primarily for people who don’t want to disclose their income or have fluctuations in income. To qualify for a no ratio loan, you will also need a solid credit score, and it’s ideal to have significant assets as well. With this type of loan carrying considerable risks for lenders, you can expect to pay a higher interest rate than one where you prove your income. Nonetheless, it is a viable option in some cases.
4. Apply for less than you can afford
When applying for a mortgage, some people get as much financing as they can afford. However, if you max your housing budget, you may run into trouble down the road. Since unexpected expenses are going to happen, a better approach is applying for less than you can afford.
This approach protects your personal finances, and mortgage lenders will have an easier time approving your application if it’s obvious you’re buying beneath your means.
5. Show the money
Some banks and mortgage companies have provisions to help borrowers with limited resources, such as zero down loans to those who qualify for certain programs (VA and USDA loans) and closing cost assistance. However, these provisions aren’t offered by every lender.
If you want to walk into any bank or company and get a mortgage, save your cash. You’ll need a minimum of about 3.5 percent to five percent as a down payment, and another two percent to five percent for closing costs.
6. Get rid of debt
You don’t have to be debt-free to purchase a home, but you’ll need a low debt-to-income ratio. Basically, most lenders want so see that all monthly minimum debt payments (including your future mortgage payment) do not exceed 43 percent of your gross monthly income.
To ensure you get a mortgage loan fast, pay off as much debt as possible before applying. This includes credit cards, auto loans, student loans, etc. This speeds up the underwriting process, and the less you owe elsewhere, the lower your risk of mortgage payment problems in the future.
Make sure you take into account any situations where you were a co-signer. Did you co-sign on your daughter’s car loan? Maybe you co-signed on a business loan for your brother. You are now responsible, too, for that debt. If your daughter or brother defaults on their payments, their lenders will come after you.
This means that the debt that you’ve co-signed for will be counted in your own debt-to-income ratios. This could make it more difficult to qualify for that mortgage loan because it could push you past the magic 43 percent mark.
Getting qualified for a mortgage isn’t guesswork, and it doesn’t have to be stressful. If you follow the guidelines above, there’s no reason you shouldn’t be qualified and living the American dream in no time.