By Peter Norden
Buying a house is no easy task, and the mortgage application process is a big reason why.
This checklist won’t prevent every potential hiccup, or guarantee that you end up in the home of your dreams, but it’ll definitely keep your expectations in check and reduce the risk of unpleasant surprises during what’s supposed to be an exciting, potential-filled phase of life.
Start Saving Early
Having an ample financial reserve increases your chances of qualifying for a home loan on borrower-friendly terms—and, in many cases, qualifying for a loan at all.
So when should you start saving?
Trick question. You should be saving right now. And if you’re living paycheck to paycheck and can’t afford to set funds aside on a regular basis, you should begin saving regularly as soon as your circumstances allow.
The sooner you start saving (and avoiding common, counterproductive savings mistakes), the sooner you’ll be ready to shop for an owner-occupied home of your own.
Stick It Out at Work
Lenders prefer borrowers with steady jobs and predictable pay. If you’re currently employed but actively seeking a new position, dial back your search until you’ve closed on your home. Any blip on your employment record, no matter how brief, is likely to count against you during the underwriting process—even if you leave voluntarily with a new job lined up.
Maintain a Favorable Debt-to-Income Ratio
Mortgage lenders look favorably upon borrowers with low debt-to-income ratios—the ratio of household installment and revolving debt to household income. What’s considered “low” varies by lender and can be affected by other underwriting factors, but there’s no reason to test the limit.
Remember that some debt is perfectly fine; in fact, the fastest way to build your credit is to use credit cards and other debt instruments responsibly. Just don’t lean too heavily on your credit lines or fall behind on your monthly payments.
Set a Strict Budget
How much house can you afford? It’s best to know the precise answer to this question before you start shopping.
If you’re not sure how the homes you’re considering will affect your cash flow, input a range of scenarios—different sale prices, interest rates, loan terms, rate structures and down payments—into a mortgage calculator.
The old-school rule of thumb, which is subject to much debate and not always easy to achieve in pricier housing markets, says your monthly housing costs (i.e., your principal and interest, tax, insurance and other line items) shouldn’t exceed 30 percent of your income.
Check Your Credit Score
Do you know your credit score? Before you apply for a mortgage loan, you’ll need to. Under federal law, you’re entitled to one free credit report per year from each of the three major consumer credit reporting bureaus.
Take Steps To Improve Your Credit Score
Credit score not what you thought it would be? Building and improving your credit takes time, but it’s not rocket science. Take simple steps like:
- Paying your bills on time
- Using credit cards and other revolving debt instruments responsibly
- Limiting your debt utilization
- Refraining from closing too many inactive accounts within a short period
- Refraining from applying for multiple credit lines or debt instruments within a short period
Look for Loans With Low Down Payment Requirements
Not all mortgage loans require 20 percent down payments. Many borrowers can qualify for loans that require far less upfront—as low as 3.5 percent for FHA loans and 3 percent for Conventional 97 loans. Certain groups of borrowers, including veterans and residents of rural areas, may qualify for no-money-down loans—though eligibility requirements are strict and the loan products are typically more restrictive than conventional loans.
Get Your Financial Documents in Order Early
Lenders love to work with well-organized borrowers. During the underwriting process, you’ll be asked to provide a slew of financial documents and records, some of which you may not have handy. You’ll avoid needless delays and keep your underwriter happy by collecting everything before the process begins.
Before you start shopping in earnest, shop for rates and get pre-qualified for your loan. Many real estate agents shy away from buyers who aren’t pre-qualified. Even if you are able to find help, trying to get qualified after you’ve put in an offer can interrupt the process—a major inconvenience, especially in active housing markets
Be Forthright and Communicative During the Underwriting Process
Originating a mortgage is not a sprint. During the underwriting process, you’ll almost certainly be asked to provide additional documentation or clarification on documents you’ve already submitted. In the interest of avoiding delays, it’s best to respond to these requests promptly and forthrightly, however tedious they seem.
Bio: Peter Norden is CEO of HomeBridge Financial Services, Inc., a leading residential mortgage lender based in Iselin, New Jersey.