Qualifying for a mortgage isn’t as daunting as it seems. You don’t need perfect credit or extraordinary income. Lenders just look for financially responsible borrowers. This means different things for different lenders.
The one thing many lenders have in common is the pre-qualification process. They all look at your qualifying information before you formally apply for a loan. They assess the information you provide. If you qualify for a loan, they give you a letter pre-qualifying you for the loan. This letter states what you may prequalify to receive. Before you contact any lenders, learn how you can make it easier.
Straighten Out Your Credit
Many lenders pull your credit before doing anything else. They look at not only your credit score, but also your history. They evaluate the following:
- How many late payments you have,
- What negative economic events you suffered
- The amount of your debt
Your credit score doesn’t tell the whole story, so they must look at each factor.
Not knowing your credit score ahead of time is like walking into the process blindfolded. Obtain a copy of your credit report. Each credit bureau provides one free report each year. Request at least one report and look over it. You should look for a few things:
- Any incorrect information that needs correcting
- Late payments you need to bring current
- Negative economic events you must explain
- High balances on your credit cards
You must get incorrect information fixed. Start by contacting the creditor and the bureau reporting it. Supply them with the right information. They then investigate what happened. If they agree the information is incorrect, they will fix it on your report.
Late payments and high balances on your credit cards are something you must handle. Obviously, you should bring your late payments current. Paying your high credit card balances helps too. Your credit score should increase as a result. In addition, your debt-to-income ratio will decrease, which can only help your situation.
Negative economic events, such as a bankruptcy, foreclosure, or collections, require an explanation. Bankruptcies and foreclosures also have waiting periods. Usually 2 to 3 years is sufficient. You may or may not have to pay off your collections; that depends on the lender and chosen loan program.
Save Money to Make Pre-Qualification Easier
The more money you have for a down payment, the better your chances of approval. There are programs that don’t require a down payment, but they have special circumstances.
- The VA loan is only for veterans of the military
- The USDA loan is only for low to moderate income families living in a rural area
All other programs require some type of down payment. The more money you have saved, the better your chances of approval. Even if you don’t need the money for a down payment, it can be your reserves. This is money you have set aside for a rainy day. If your income fell through for some reason, this money could carry you through the hard times. In other words, it can keep your mortgage current.
Don’t forget about closing fees too! They can be as much as 5% of your loan amount. You may get a little help getting them paid, but not always. For instance, the seller may pay a portion of the fees or your lender may pay them. There is always a price, though. Saving money now will help you afford the loan and secure your pre-qualification.
Make Your Income Stable
Lenders like consistent income. You may not need a consistent 2-year history any longer, but it helps. Lenders look at the big picture. Let’s say you have a lower credit score and borderline debt ratio. They already consider you risky. If you have only held your current job for 6 months, it doesn’t provide them with much reassurance. On the other hand, a job you held for 2 years or more is more stable.
If you do change jobs right before applying for a mortgage, try staying in the same industry. You can easily explain job changes made for a better position or higher pay. However, if you switch jobs because you just wanted a change and have no experience in the new industry, you could make it tougher on yourself.
Know What You Can Afford
Walking into a lender’s office and hearing numbers thrown at you can be overwhelming. Try educating yourself before applying for a loan. Put your information in a mortgage calculator so you can see what you can afford. Lenders often prequalify you for the largest loan amount you qualify for. This may not be a number you are comfortable with though. Running the numbers yourself will give you an understanding of what you want. This way you can let the lender know where you want to be. It can be very exciting to hear large numbers thrown at you. House hunting is often emotional. If you hear you can afford a more expensive home, you may take it. Take that piece out of it by knowing firsthand what you can afford.
Don’t let applying for a mortgage get overwhelming. Take your time and understand the process. If you pull your credit and evaluate your debts first, you are ahead of the game. You put yourself in a better position for pre-qualification. Saving money and doing your research also help. Know what programs are out there and consider what you want. If paying Private Mortgage Insurance doesn’t appeal to you, start saving for a larger down payment. If you want help with your closing costs or have mediocre credit, consider an FHA loan.
Each loan program has its own benefits. Only you know which program suits you best. The more information you arm yourself with before you apply for a loan, the better. This way you know what you want and can afford. You also know what options you have. If you don’t like the offerings of one lender, shop around with others. There are hundreds of lenders at your disposal. Find the one that suits you best since your home will be one of the largest investments you make.