For most people, buying a home requires securing a mortgage. Very few Americans have enough money to purchase a house in cash, so borrowing from a mortgage lender is part of the overall process.
Getting a mortgage isn't easy, and the approval process can be tricky. Before a financial institution will hand over hundreds of thousands of dollars, it wants to know a lot about you. That makes sense because this relationship may last 30 years, and the lender needs to know it can trust you.
Before you begin the process of landing a mortgage commitment, you'll want to make sure you have your finances in order. That's not always a pain-free process, but it's one you're better off handling yourself rather than letting your lender tell you what's wrong with your application. Follow these four steps, and you should greatly improve your chances of qualifying for that mortgage.
1. Pay off your debts
Your potential lender will evaluate your total financial picture. One red flag is if you have significant debts before you even take on a mortgage. Ideally, you want to pay off all debts. That will increase your credit score, make you more attractive to the lender, and raise the ceiling on how much you can borrow.
If you can't pay off all your debts (maybe you have student loans and/or a car loan), focus on credit card debt, which generally comes with with the highest interest rates. If you can eliminate your credit card debt, your application will look stronger. If you can't then you should consider whether now is the right time for you to buy a home.
2. Get your credit score in order
A higher credit score improves your chances of getting approved for a mortgage, and there is one big thing you can do to improve your score in the short-term -- pay off any balances you have.
Most of the other things you can do to improve your credit score take time. You can't lengthen your credit history quickly. You can, however, avoid applying for any new lines of credit (inquiries lower your score) and make sure you pay all your bills on time.
3. Get your paperwork together
Nearly every mortgage lender is going to want a long list of supporting documents along with your mortgage application. These include (but are not limited to):
- Two years of bank account history.
- Your two most recent pay stubs.
- Two years of tax records.
- Documentation proving that any money from your family is a gift and not a loan.
You will also want to be prepared for your potential lender to verify your past two years of earnings. If that involves multiple employers, you may want to give everyone who might get that call a heads-up.
4. Know your limits
Mortgage lenders generally use the 28/36 rule. That means they want your mortgage payment to be no more than 28% of your gross monthly income while your overall debt should not be more than 36%. You don't have to borrow right up to the 28% line, but knowing where you fall on that scale should give you a solid idea as to what you will be approved for.
Be patient, and expect pain
The mortgage lending process can be painful. Lenders may reject you when it seems like you should be approved or roadblocks may come up along the way. Try to relax and realize that you're asking for a lot of money, and it may take some work to convince a bank or another lender to give it to you.
Problems may come up. Try to handle them as they happen. Being as prepared as possible going into this process should minimize the pain and increase your chances of success.
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