Getting a mortgage isn’t as hard as it seems. If you’ve never owned a home, it can feel overwhelming, but with the right steps, you can increase your chances of mortgage loan approval and take advantage of today’s low interest rates.
Check your Credit
Your credit score is the lender’s first impression of you. When you complete an application, the first thing the lender does is pull your credit, look at your score and your credit history.
Before you apply for a mortgage (do this months before you apply), pull your credit. Every consumer gets a free copy from each bureau once a year here. Pull all three bureaus and look at your credit history.
These credit reports may not show your credit score, but you’ll see your history, which is just as important. Go through line by line looking for the following:
- Late payments – Any payments over 30 days past due hurts your credit score and your chances of loan approval. Bring all payments current and keep paying your bills on time. Your payment history makes up a large portion of your credit score so this is important.
- Errors – Human error happens all the time. As you go through your tradelines, first make sure they all belong to you. Sometimes accounts get reported in error or due to fraudulent activity. Next, go through each tradeline and make sure the payment history, payment amount, and balances are all reported correctly.
- Overused credit lines – Your credit utilization rate or how much credit you use compared to your credit line makes up another large portion of your credit score. Look at each credit card and try to make sure that your percentage of usage is as low as possible.
If you want to check your credit score, check with your bank or credit card company. Most offer free access to at least one credit score. This shows you where you stand. You’ll need a minimum credit score between 580 – 660 depending on the loan program you want. The higher the better
Pay Down your Debt
Lenders look closely at your debt. They want to know that you can afford the mortgage payment beyond a reasonable doubt.
They compare your current outstanding debts to your gross monthly income (income before taxes). The current debts they consider include:
- Minimum credit card payments
- Car payments
- Personal loans
- Housing debt (current or new)
- Installment loans
Ideally, your total debt ratio, which includes the new mortgage plus your existing debts shouldn’t exceed 35 – 45% of your gross monthly income.
If your debt ratio is much higher, see what you can pay down before you apply for a loan. Also, look at the type of debt you have outstanding. If you have a large amount of revolving debt, for example, pay your credit card balances down before applying for a mortgage.
Stabilize your Income and Employment
Today, many people have an unstable employment history thanks to the pandemic, but see what you can do to stabilize your income and employment before applying for a loan. You can also check with a lender to set a more accurate amount.
Ideally, lenders want a stable employment history, but if you have a reasonable explanation why you have a slight gap in your employment or why you changed jobs, you may still qualify.
The key is to show that you are consistent and reliable. If you lost your job due to COVID-19 because the company shut down or downsized, that’s not your fault. As long as you prove you found a job as quickly as possible and make the same (or higher) income, it probably won’t affect your ability to secure a mortgage.
If, however, you change jobs frequently and never seem ‘stable,’ it could make it harder to get approved.
Save for a Down Payment
Not every loan program requires a down payment, but most do.
In addition to the down payment, you’ll need to cover closing costs. Depending on the loan and the lender, closing costs can be as much as 2 – 5% of the loan amount.
Some loan programs, such as the FHA have options to help with the down payment and closing costs, though.
You may be able to accept gift funds from family members to use for the down payment. If your credit score is high enough, you may even use gift funds for the majority of the down payment. Some lenders allow sellers to help with the closing costs or the lender may even help cover them but will increase your interest rate by 0.5% or so.
Establish an Emergency Fund
Lenders don’t often require reserves (liquid assets on hand), but if you have them, it can work in your favor increasing your chances of mortgage approval.
Liquid assets are money you can turn to cash immediately, such as money in checking, savings, bonds, or the stock market. Money invested in a physical asset, such as a car or house doesn’t count since you can’t liquidate them right away.
Lenders count reserves by how many months of mortgage payments they cover. For example, if your mortgage payment is $1,000 and you have $12,000 in addition to your down payment and closing cost funds, you have 12 months of reserves.
Many lenders use reserves as a compensating factor. For example, if you have a credit score near the lower end of what lenders require, but you have a decent amount of reserves, they may still approve your loan.
Don’t Apply for New Credit
In the months leading up to your mortgage application, don’t apply for new credit. This could hurt your chances in a few ways.
First, it lowers your credit score. New credit could hit your credit score for an inquiry. It may be only 5 points, but it still drops your credit score. If you’re already close to the minimum score required, one or two inquiries could drop you below the limit.
Next, new credit lowers your average credit age. A percentage of your credit score is made up of your credit age or the average age of all trade lines. Every time you open a new tradeline, it brings the average age down, which can hurt your credit score.
New credit also increases your debt-to-income ratio, which can hurt your chances of mortgage approval even further. Wait until after you close on the home to take out new credit.
Don’t Rack up Credit Card Debt
Once you find a house, don’t increase your credit card debt. Even if you already got approved for a loan, lenders check your credit again before you close.
If you max out your credit cards buying furniture and items for the home, it can ruin your mortgage approval. Many lenders pull your credit immediately before you close. If your credit score dropped because of the higher credit utilization rates, it could ruin your approval.
New debt also changes your debt-to-income ratio, which can hurt your chances of approval. If things change too much, the lender must go back to square one, underwriting your loan all over again, which could lead to a delay or even a denial.
Work Closely with your Loan Officer
Your loan officer is the number one resource when you’re trying to get approved for a mortgage loan.
Find a loan officer you can trust and get pre-approved for a loan. The pre-approval isn’t a guarantee, but it’s like getting your foot in the door. Your loan officer knows what lenders need and how to get you approved. Listen to his/her advice for the best results.
The key is to provide requested documentation fast and to listen to any conditions you must satisfy to close the loan. It may feel like an arduous process or as if it takes forever, but in reality, from start to finish, you can close a loan in 30 – 45 days if you get your documentation in quickly.
It’s not as hard as it seems to increase your chances of mortgage loan approval. The more steps you can use from above, the higher your chances of approval.
Focus on your credit score, amount of debts, and stabilizing your employment for the best results, and talk with a reputable loan officer about the many loan options you have today.