Purchasing a home is often considered a major life achievement and is a dream that many people have. Nevertheless, the procedure of application for the mortgage loan may appear to be quite challenging and tense. The great thing is being ready by having good credit rating, good income and being able to handle the debt. Here’s a quick breakdown of what lenders consider and how to get yourself in the right position to be approved for a mortgage.
Check Your Credit Score The first thing is to review your credit report from the three credit bureaus namely Equifax, Experian, and TransUnion. Lenders will consider your credit score, which is a three-digit figure that gives an overall summary of your credit worthiness according to your credit reports. Both raw and adjusted scores usually fall within a scale of 300 to 850. Ideally, you should try to achieve a score that is higher than 740 in order to be able to secure the most favorable interest rates on mortgage loans. If your credit score is low, you need to work to improve it before filling the application, you need to pay your bills on time, pay-off your balances, and correct credit report errors.
Verify Your Income Banks demand evidence of the ability to make steady payments on the loan taken to finance the home. Such documents may include the pay stubs, W-2s, and tax returns of the past two years. Other types of borrowers who may require even more documentation include self-employed borrowers who need to submit copies of business tax returns and statements of financial position. Ensure that you are earning a steady income and the amount fluctuates little between the months. Such gaps or red flags could mean more attention from lenders.
Reduce Your Debt Lenders determine your debt-to-income ratio or DTI, which is the sum of your total monthly obligations to income before taxes are taken out. The benchmark is a 36 percent DTI, however, the closer you are to zero the better off you are. This one is self-explanatory, pay off credit cards, auto loans, student loans and other debts to reduce your DTI. Take together credit card or other debts bearing high interest rates to enjoy reduced monthly payments. Do not borrow any money for any purpose before approaching a mortgage lender.
Build a down payment It is not uncommon for a mortgage to insist on a down payment of at least 20%. That means coming up with 20 percent of the price of the house as the down payment. Without that, you will normally be expected to pay for something known as private mortgage insurance or PMI for short until you have established 20 percent equity in the property. Low down payment programs are in place, but the bigger down payments attract better rates. Build up your down payment fund as early and as frequently as possible.
Get Preapproved A pre-approval letter from a lender means that you are eligible for a mortgage through a soft credit check and it validates information such as income, assets, liabilities and down payment. When searching for a house, the sellers understand that a preapproved buyer can easily go through with a purchase. It is to be noted that preapprovals are usually valid for 60-90 days. Make sure that you do not incur other debts during this time.
Shop Multiple Lenders Every mortgage lender has its own mortgage rates, loan programs and it also has its own set of conditions for approving loans. This helps one to obtain the most attractive rate and terms of a loan from the various available options. Check multiple options from banks, credit unions, online lending services and mortgage brokers. Preapprovals from various places should be viewed as rate locks keep mortgage rates constant as you look for a house.
Review Your Credit Report This is the time when lenders make the last credit check before giving out the loan to the borrower. Check that all the details of your employment history debts, credit score payments, and income is accurate. Challenge and resolve issues that may potentially harm the approval process for you. Do not make any significant purchases like a car prior to closing since the property is still technically owned by someone else.
Provide Documentation There are certain forms that your lender will ask for during the underwriting process including your bank statements, investment accounts, tax returns and in some cases your asset statements. Provide fresh recent records as soon as possible with clear and complete information. It is also important to explain any suspicious activities such as large deposits or withdrawals. You may lose your interest rate lock if you do not submit the paperwork on time.
Consider Getting A Co-signer If your credit score or your debt-to-income ratio is just a little low, then you can use a co-signer who has a very good credit score and financial background. This co-borrower would be obligated to pay back the mortgage in equal measure. Another option is to ask the seller or another party contribute to the second loan or grant program needed for the down payment.
Be Patient During Underwriting Underwriting is a process in which the lender thoroughly approves your loan by analyzing your financial status. Underwriting typically takes about 14 to 30 days on average, but this depends on various factors. Get the updates through your loan officer. It is unwise to switch jobs or make large purchases during this crucial stage or else one will have to start from the beginning. The finish line is getting closer when one is signing the last papers and receive the keys to the house.
Purchasing a house is always a difficult process, but it is one that is incredibly fulfilling for many individuals. Patients should persevere during the entire mortgage process. Make sure you gave the lenders your best shot by ticking these boxes lenders wish to see. Be prepared to provide documents at short notice and respond to questions from the lender. When you endure denial, try to establish what the reason is then improve your chances for the next time. Thus, residents of homes of every income level can achieve their dreams as long as they work hard and do not give up.
