If you’re thinking about purchasing a home there are several things to consider as you begin the mortgage process.
1. Know what you need
When you are applying for a mortgage you will receive a package of materials to complete and return. You will need copies of two years’ tax returns, current pay stubs, at least six months of checking account statements, proof of funds for your deposit and statements from your savings account, stock portfolios and retirement accounts.
Many real estate agents have a relationship with different lending agencies which can be beneficial in moving the process along.
2. Know how much you can spend
Most lending agencies use a standard calculation to analyze your financial ability to pay a mortgage. They allocate 28% of your gross income for mortgage payments and about 8% for all your revolving debt payments (ie car loans, credit cards and any other debt).
Banks are steadfast with the calculation that your income to debt ratio be no more than 36% of your gross annual income. Some private mortgage lenders may be willing to let you squeak by with a little more debt.
3. Understand the market you’re buying in
The type of home you are buying and the current market, will be a major factor in the loan the financial agency offers you. Sellers sometimes have an inflated price tag on their home. Lending agencies will canvas the last properties sold to gain an average price for that area.
Banks will not extend a mortgage to you if your down payment is 20% of the assessed home value. You must have additional funds to pay the difference in the asking price and the assessed home value. Some builders go bankrupt during condominium projects and new developers take over. In this case, lenders will require the finances of the developer before considering your loan application.
If you’re not quite ready for a home you may be looking to invest in a cooperative (co-op). Lenders will require financial statements from the cooperative board to ensure the corporation has a sizable fund to maintain the property. Hopefully, you are working with a competent real estate professional that can direct you towards properties that don’t put your purchase at risk of being denied by these situations.
4. Raise your credit score
A major factor in determining your loan approval, type of mortgage offered to you and the interest rate you will pay is your credit score. Be proactive and send for a credit report from the three major credit bureaus (Experian, Equifax and Transunion).
There are many services that offer a one time free credit report. Many credit card companies include your credit score on their months statements, such as Discover Card, but this isn’t thorough enough. It is important to have a detailed copy of your credit history to verify the information it contains. There can be items on your report that you can appeal with the individual company. For instance, if you have a late payment history with a retail company you can reach out to them by phone or email and inquire about having them contact the credit bureaus to delete the late payment.
Of course your payment history other than a one time blip should be consistent for this to happen. It’s also possible that you might find information that isn’t valid, like a credit card you never opened. Being aware of any possible fraudulent activity on your credit is important and necessary to repair.
Paying off credit card balances or paying more than your monthly required payment amount can possibly raise your score a few points. Also, avoid opening new credit accounts, and changing wireless or cable carriers as all these businesses require a credit check which will lower your credit score.
5. Pay off your debt
As mentioned above, lenders are steadfast in their amount of debt to income percents. Paying off credit card balances should be done prior to applying for a mortgage to prove your financial standing is strong.
6. Have your taxes in order
All lending agencies will require at least two years of tax returns when analyzing your financial history. They will also verify your current year’s salary with your employer. Forms are submitted to the Internal Revenue Service (IRS) to confirm that your financial information is accurate.
7. Avoid any big purchases
If congratulations are in order because you have received the approval from the financial institute, know that your spending can still affect your mortgage process. The lender will continue to monitor your spending to ensure that your ability to pay your mortgage and taxes stay true to their initial financial review process.
You can certainly go shopping for furniture for your new home, but don’t use your available funds or charge any large purchases until you actually own the home. Taking on a new car loan or applying for new credit cards should also be postponed.