Buying a home is a momentous occasion for most people. However, doing so almost always requires a mortgage. Applying for a mortgage loan and having your application approved is often more stressful and challenging than the home buying process itself. With that said, being prepared for what’s in store can put you in a position where these difficulties are minimized.
Consider the following before deciding to apply for a mortgage:
It’s important to do your homework regarding various lenders. Application requirements, interest rates, loan type, and approval parameters vary from one lender to another. Consider using a web capture tool to document this information as you come across it online. Once you’ve given all the potential options a look, consult these captures to compare notes. Viewing the differences side-by-side will make it easier to determine which lenders are the best choice for your situation.
Improve your credit score
Once you’ve narrowed down the list of best mortgage options available, it’s time to devise a six-month gameplan for getting yourself into the best financial position possible for approval. This almost always requires an effort to improve your credit score. Do so by taking steps to rein in your credit utilization while continuing to demonstrate responsible credit usage. Check your credit report to spot errors that negatively affect your score and take steps to have them corrected. All of this should be done prior to your mortgage application.
Know the 28/36 rule
Most lenders rely on what’s known as the 28/36 rule when determining whether or not a mortgage applicant qualifies for loan approval. The mortgage payment must be no more than 28% of your gross monthly income, while your total debt obligations (including the mortgage payment) can’t exceed 36% of your gross monthly income. These include car payments, student loans, and credit cards. Do the math to determine whether or not your financial situation fits into these parameters before you decide to apply for a mortgage.
Gather the right documents
Lenders want to get to know as much about your financial situation as possible. This usually includes pay stubs, tax filings, and bank statements. While it varies from one lender to another, they typically want to see a month’s worth of paycheck stubs, two years of tax filings, and three months of bank statements. Have all this information readily available before applying.
Pay down debt
Chances are you’re at or over the 36% benchmark mentioned above. You want to lower that figure as much as possible before applying for a mortgage. The simplest way to do so is to pay off as much debt as possible. It’s easier said than done, but the truth is that a high volume of debt obligation will make it difficult to afford a monthly mortgage payment. It’s in your best interest to lower your monthly debt obligations as much as possible, in order to be in a better position to manage the financial situation being a homeowner will bring.
Don’t make any major purchases
Last but not least, you want to hold off on any major purchases before and after applying for a mortgage. In fact, it’s imperative to resist doing so even after you’ve been approved; lenders will continue to monitor your financial situation and have every right to rescind their agreement if they discover you’ve increased your debt obligation by racking up credit card debt.
Being approved for a mortgage is more difficult than ever before, but for good reason. Lenders need to make sure borrowers are in a position to fulfill their end of the arrangement. This requires a lot of paperwork and financial maneuvering, but the ends justify the means. Being prepared is key to being approved.