There are few things more disappointing than finding a dream home, then applying for a mortgage and being turned down. Prospective homebuyers, especially those who have had their mortgage applications rejected in the past, and those with little to no credit, can benefit from thinking like lenders and putting their financial profiles under the microscope. These tips can improve your chances of getting a mortgage approved.
Know What Your Credit Report Says
Some mortgage applicants first learn their credit scores and the contents of their credit reports when they sit down with a loan officer to apply for a mortgage for the first time. Finding out about low credit scores and numerous negative entries on credit reports, such as late and missed payments and judgments, in front of a prospective lender, can be embarrassing and puts loan applicants on the fast track to rejection. At the first thought of buying a home, consumers should order copies of their credit reports from the three credit bureaus — Equifax, TransUnion and Experian 3 — and make a note of their credit scores. Lenders typically require credit scores higher than 680 for conventional mortgage approval — between 620 and 640 to approve government-insured mortgages such as FHA, VA and USDA loans — so people with credit scores lower than this range should contact the credit bureaus to correct errors and then make sure to pay their bills on time.
Pay Down Debt
Lenders want mortgage applicants to dedicate no more than between 36 and 43% of their gross monthly income to paying debts — such as car payments, installment loans and credit card bills; the lower percentage applies to conventional mortgages, and the higher percentage applies to government-insured mortgages. Individuals thinking about buying homes should first pay down as much debt as possible so that their total debt falls within these guidelines. Consumers don't need to pay off their debts entirely — in fact, having some debt and paying it regularly shows financial responsibility — but consumers should aim to have as little debt as possible.
Have the Down Payment in Hand
The days of zero-down mortgages are over. Prospective homebuyers should have their down payments in their bank accounts well before they sit down with lenders to be taken seriously. Down payments for most home loan types can come from personal savings; many loan types also allow borrowers to use cash gifts for down payments, including FHA, VA, USDA and conventional loans, as long as the gifts are from approved sources per the loan type's guidelines. Borrowers should, therefore, confirm their gift sources well in advance of applying for mortgages. Homebuyers planning to use funds from their retirement accounts, such as a 401(k), Roth IRA or traditional IRA, should confirm the procedure for borrowing money from the accounts, as well as the amount available to use for a housing purchase.
Stay Employed Throughout the Loan Process
A loan applicant's job and the salary earned play a critical role in being approved for a mortgage. Even if applicants don't like their job, he should keep it until the loan is approved. This is because the lender checks and rechecks the information loan applicants provide, and if an applicant is employed at the time of initial loan application and unemployed — or employed in a job paying less than the previous job — upon revaluation of the loan application, the lender won't approve the mortgage.
Know How Much Home You Can Afford
The brand-new five-bedroom, three-bathroom house in the priciest subdivision in town might be the ideal home for many, but lenders only approve home loans for applicants can afford them. Before home shopping, prospective buyers should sit down with their loan officer of choice and get preapproved. Preapproval doesn't guarantee final loan approval, but it gives homebuyers a price range in which to shop. Knowing this number makes for a less frustrating experience for homebuyers and the real estate agents helping them find homes. Most real estate agents won't work with homebuyers unless they have been preapproved for a mortgage.