Are you thinking about applying for a mortgage in the near future? If this is your first time buying a home or securing a loan, there are some things you should know before signing on the dotted line to obtain what’s most likely the largest item on the left side of your personal balance sheet. Don’t be tricked into thinking that getting qualified for a mortgage is as easy hitting one button and money appears (as portrayed in the Quicken Loans “Rocket Mortgage” commercials). Although most colleges and universities don’t offer a “how to get a mortgage for dummies” course (although they probably should), adults are expected to know the nuances of mortgage approvals, which continues to evolve over time. Here are five things you should do to prepare yourself for applying for a mortgage.
Get Your Mortgage Documents Together!
When it comes to proving your ability to pay back a loan, more is more in terms of paperwork. The buyers listed on the loan should be prepared to present their lender with at least a month of recent pay stubs, two years of tax returns, three months of bank statements (checking and/or savings accounts), and any other financial documentation that may prove you will be able to make on-time monthly payments.
Raise Your Credit Score As Much As You Can
There is no magic formula to raise your credit score in a very short period of time, but making sure you’re taking steps to keep your score high is crucial before applying for a mortgage. Most borrowers don’t realize that your credit score not only affects your odds of approval, but also is directly correlated to the interest rate the lending institution is willing to offer you. The higher your credit score when applying for a mortgage, the greater your chances of a lower interest rate will be. If you have no idea what your credit score is, now would be the time to check it and make sure that the items listed on your credit report are accurate.
Pay Off Outstanding Debts
Some first-time borrowers may think that having a ton of reserve (liquid) cash may increase their chances of obtaining a loan. The fact is, lending institutions do not really care about your cash in the bank, but do care a whole lot about what you’re paying for on a recurring basis with that cash. Most lenders like to see your debt-to-income ratio at or below 30%. Meaning, if you make $5,000 per month, but use $3,500 of it to pay off credit cards, auto loans, or student debt, you’re most likely not going to get approved for an additional liability that requires a large monthly payment. Decrease your existing liabilities before trying to obtain a new one.
Make Sure Your Taxes Are Up To Date
As mentioned above, most lenders will want to see at least two consecutive years of tax filings from each borrower listed on the loan. The lender will double check the information you give them against what is on file with the IRS, so make sure that the documentation you include as part of your mortgage application matches what’s on record with the IRS.
Know The Market You’re Borrowing In
Mortgage laws in the U.S. are not universal, and can vary drastically depending on your state or region. A state that has experienced higher levels of bankruptcies and foreclosures may have stricter application requirements, and may even require a larger down payment just to secure an average-sized loan. Do research relative to your prospective new neighborhood so that you are not surprised (and possibly disappointed) by the requirements of your application.