Applying for a mortgage isn't anybody's idea of a good time. But that doesn't mean it has to be a miserable, much less unfruitful, experience.
With this in mind, I surveyed a handful of highly regarded mortgage brokers to learn what prospective borrowers should do before applying for a mortgage. What follows are the five most frequently cited actions that will markedly increase your chances of being approved.
Click here for a list of the five most common reasons that mortgage applications get denied.
1. Reduce credit card balances to no more than 35% of the limit
This is a point I heard multiple times in my conversations with mortgage brokers. If there's one thing besides a poor credit score that causes loan denials, it's having too much existing debt.
There are two general rules to know in this regard. First, as Matt Hodges of Presidential Mortgage Group told me, the current balance on your credit card should not exceed 35% of the limit.
And second, you should try to minimize your debt-to-income ratio. "A high DTI simply means that you don't make enough money to borrow what you're asking for," said James Adair of PDX Home Loan in Portland, Ore. For Fannie Mae and Freddie Mac, the acceptable limit is in the 45% to 50% range.
2. Make sure assets used for the transaction are seasoned for at least 60 days
This is another point that came up time and again. While you look at all of your assets the same, a loan officer won't.
Take cash as an example. While you may have $20,000 in hard currency hidden under your mattress -- what better asset is there than cash? -- a bank won't consider it in your favor unless its source can be verified and it's been sitting in a bank account for at least 60 days.
"Bank guidelines now require that any large, non-paycheck deposits (typically over $500) need to be sourced, with a paper trail (invoices, supporting bank statements, etc.), and an explanation letter," said Dakota Gale of Green Mortgage Northwest in Portland, Ore. "This can be a huge amount of work for you as the client, and can potentially delay your loan. So before you deposit that 1099 contractor check or a gift from Mom, ask your loan officer what the best way to proceed is!"
3. Compile the necessary financial documents ahead of time
"Your loan officer is going to ask for a lot of things," Gale went on. "Copies of your driver's license, address, and work history, pay stubs, W2s, and tax returns for the last two years, recent bank statements, naming rights for your next child ... these are all fair game -- OK, maybe not the last one."
The point being, the mortgage application process is indeed a process. And as a result, the better prepared you are for it, the better your chances are of getting approved.
"Put together a package of clearly labeled PDFs with relevant financial documents in separate files that you can easily deliver to mortgage professionals in order to shop around for the best rate," Gale advises. "Great loan officers will drive the process forward, but you can help things along by being prepared."
4. Get your credit checked well ahead of time
Although this probably goes without saying, it's important to point out that not only is it important to check your credit, but, as Hodges told me, it's also critical to do so in a timely enough fashion so that "simple errors can be corrected prior to the time-crunch to close your loan."
In terms of credit scores themselves, the ideal benchmark is 740, as the middle of the three major consumer credit agencies. "When a credit score is in 20-point increments lower than 740, the loan is more likely to incur late payments or default," says Hodges. "Agencies are compensated for that risk by increasing the cost to the borrower through either points or rate or both."
The one caveat is that you should avoid filing any credit disputes unless it's absolutely necessary. "That $75 parking ticket that went to collections where you SWEAR you weren't parked in the yellow? Just pay the bill, get documented proof that you did, and be done with it," Gale said. "Otherwise, you risk having the credit bureaus create a big headache for you and your loan."
5. Educate yourself on the loan process
Last but not least, you should educate yourself on the loan process itself.
Think of it as a purchase of money -- that is, separate and distinct from the purchase of a home -- with the cost being the interest rate and points. If you want to minimize the cost and avoid being taken advantage of, you have to know what you are doing.
In addition to researching and shopping around for the right mortgage broker, you should take a few hours to get an idea about what the going interest rate is for a mortgage. You can get this on Freddie Mac's website, as well as at places such as Mortgage News Daily.
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