Applying for a mortgage? What an exciting time! Becoming a homeowner can often be one of the most fulfilling life experiences, as you are planting roots, making an investment in your future, and you’ll finally have say over what you can do to make your digs your own.
The process of preparing to apply and actually applying for a mortgage can be a bit labor intensive, however, so it’s best to be totally prepared. Read on for everything you need to know about applying for a mortgage. If you have plans to later do a mortgage refinance, you may as well look into that at the same time.
Check Your Credit Score
You might assume that your credit score is high due to being financially responsible all your life, but life can definitely throw you a curveball in this regard. In fact, this article by TheMotleyFool.com notes, “One of the key factors in determining whether or not you will get approved for a loan and what rate you will pay is your credit score. It’s important to know what your scores from the three major credit bureaus are, and you can get that information in a number of ways. There are paid services that offer a detailed report, and many credit card companies offer their customers free credit scores.”
Once you’ve got your number, you can make efforts to raise it. First and foremost, correct any mistakes. Credit disputes result in reversals all the time, so make sure to get these fixed. Other things you can do are: pay off a balance in full, open other new accounts, take other new loans, and do something that requires a credit check.
Have Your Paperwork Ducks in a Row
There are quite a few things you’ll need in order to apply for a mortgage, so the process will got much more smoothly if you have these ready to go. Your potential mortgage lender can help you, but in general you’ll need the following:
- Three months of bank account statements
- Two years of recent tax filings
- A month of pay stubs from buyers
- Documentation for any abnormally large payments or withdrawals
Also, be aware that your potential lender will expect that the tax documents you provide them match what the IRS has. If you’re not in good standing, it will come to light during this process.
It will also be helpful to get information on tax form 4506T, as this form allows lenders to access your financial records from the past few years in order to verify your income with the IRS.
Familiarize Yourself With the 28/36 Rule
Most lenders use this, so you need to understand it and meet these guidelines. As explained in this Investopedia.com article, “The 28/36 Rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans.” While it’s not considered a legally binding rule, it has become a dependable guideline enlisted by most mortgage lenders in order to prevent default.
Examine Your Market
You might know someone who was just approved for a mortgage and assume you will be, too, as your financial situations are quite comparable. The truth is, this might not be the case, as some states and even cities within those states are stricter than others. If a state has been prone to many bankruptcies, they will want to examine your finances as well as the finances of the property you’re hoping to buy.
Bid Adieu to As Much Debt as Possible
We know this is no easy feat, especially when you are applying for a mortgage. It’s quite the Catch 22, though, as you won’t get the mortgage if your debt-to-income ratio isn’t favorable. Think about paying off things like car loans, credit cards, and the like, even if you have to borrow money from a loved one. Not only will this help your credit score, it will improve the whole picture in the eyes of your lender.
The house of your dreams awaits you. Make your mortgage checklist, tick off the necessary items, and you will be on your way to a wonderful future as a proud homeowner.