In the most recent Federal Reserve Report on the Economic Well-Being of U.S. Households, just about half of the respondents said they were confident that they would be approved for a mortgage if they applied for one.
Is it really that tough to get a mortgage? If you are among the 47.5% of the population that is unsure of your ability to get approved, here is what you need to get a mortgage and three things you can do to make sure you get approved.
What you need to get a mortgage -- the short version
I call this the "short version" because your actual mortgage application packet is likely to be 100 pages long or more. However, the basic qualifications for a mortgage are pretty straightforward.
First, you'll need decent credit. The process will be much easier with excellent credit, but it's not necessarily a requirement. Even without going through the FHA, you can get approved for a mortgage with a FICO score as low as 620, but the rest of your application needs to be very solid.
You'll also need a down payment, but not necessarily a big one. It is advantageous to be able to put 20% down, as it will let you avoid mortgage insurance, but there are mortgage programs that allow for down payments of as little as 3%. Veterans and rural homebuyers might even qualify for 100% financing.
Finally, you'll need enough income to justify the mortgage as well as a solid employment history. Generally, the mortgage payment can't be more than 28% of your income, and all of your debts combined (including the mortgage) can't be more than 36%. However, with stellar credit or a large down payment, these guidelines could possibly be bent. Additionally, you'll be expected to show at least two years of steady employment.
Know where you stand
The data can be a little scary, since the average FICO score for a rejected conventional purchase mortgage is currently 722 -- well into the realm of "good" credit. However, loans are rejected for all kinds of reasons, and your credit score is just one factor.
Having said that, there are a few red flags that lenders don't want to see. For example, if you have any unpaid collection accounts, you'll probably be required to pay or settle those before a mortgage company will approve you, regardless of whether your score is good or not.
When it comes to your credit, be proactive so you know where you stand. Under law, you are entitled to one free credit report every year from each of the three credit bureaus. Request yours from annualcreditreport.com (not one of those "free credit report" sites advertised on TV), and check it for negative information and errors.
If you want to check your credit score, you can buy your real FICO score is at myFICO.com. Beware that a lot of "credit scores" you buy from other sites aren't very useful, as most lenders use the FICO model.
Document, and then document some more
Make sure that everything you claim on your mortgage application can be backed up with the necessary paperwork.
Before you even start the process, gather your past two tax returns, last few pay stubs and W-2s, documentation of how long you've been at your job, and anything else the lender might ask you about employment-wise. If you're self-employed, make sure you can thoroughly prove that you actually made what your tax return says you did. You'll also need statements from your bank and investment accounts to show your current assets.
If you aren't sure whether something is relevant or not, add it to your documentation stack anyway. It's easier to request another copy of missing paperwork now than it is when you've already agreed to buy a home and are on a time crunch.
One of the most effective ways to make sure you'll qualify for a mortgage is to get preapproved. The lender will check your credit, verify your income and employment, and give you a good idea of how much house you can afford.
Plus, all of your documentation will already be in place once you decide on a home. When you successfully obtain a mortgage preapproval, it's rare to get rejected for the actual mortgage, unless something happens while you're waiting to close.
After you apply, leave your credit alone
Speaking of the "waiting to close" period, once you've decided on a home and submitted every requested piece of documentation, you aren't done yet. Most lenders will check your credit again shortly before your closing date to make sure nothing has changed.
Once you have applied for a mortgage, there are certain things not to do before the loan actually closes. Don't apply for any new credit. Period.
And, don't run up your existing credit cards. In addition to reducing your score, this can raise your monthly payments to the point where your debt-to-income ratio no longer justifies the loan.
Getting a mortgage is a lot of work, but if you do all of these things, there should be no doubt in your mind about your ability to get approved.
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