Mortgage rates are rising, which should push some people who had been waiting to enter the housing market to make the move.
However, just wanting to buy a house does not mean a bank or other lender will actually give you the money. Lending standards, while looser than they were a few years ago, remain fairly tight. That makes it important to have all of your ducks in a row before applying.
Even well-qualified buyers can have problems getting a mortgage if they don't have everything handled properly. In some cases, not having needed documents available can create a roadblock that leads to delays, or even denials. Even with many lenders being more willing to loan to people right on edge when it comes to credit scores or income, overall standards remain much tighter than they were in the pre-2006 housing bubble world.
Fix these three things, and as long as you can actually afford the house you hope to buy, you will be able to get a mortgage. Ignore them, or don't pay them enough attention, and you could end up having to pay a higher interest rate -- or not being approved at all.
Fix your credit score
Aside from income, your credit score is the key metric any lender will use to decide whether your are worthy of a mortgage. Before you know if yours needs fixing, you need to understand what yours is. That's easy to do since many people have a credit card that offers free access to your credit score along with some basic credit report information.
If you don't have that, it's easy enough to get a free copy of your report from all three major credit bureaus. In fact, according to the the Federal Trade Commission (FTC), all Americans are entitled to one free copy of their credit report from each company once every year. You can get access to yours at annualcreditreport.com, "the only authorized website for free credit reports," or by calling 1-877-322-8228. You will need to provide your name, address, social security number, and date of birth to verify your identity.
Once you have your credit reports, you'll want to check it for mistakes. You can't correct things that are true, but sometimes there are items on your report that shouldn't be there. If that happens, it's easy enough to report the problem and make your case to have it removed.
The only other thing you can do in the short term to affect your credit score in a major way is to make sure you pay off all outstanding balances. If you were using more than 20% of your available credit, that could impact your score, and if you were using over 50%, the jump in your credit score can be dramatic.
Aside from those two things, most credit fixes simply involve time. Pay your bills on time, keep your balances low, and stop applying for new lines of credit. Ideally, you started doing those things a year or even longer before applying for a mortgage, but if you didn't, starting now is better than not starting at all.
Fix your debt-to-income ratio
While credit scores can be a bit mysterious and unpredictable, debt-to-income ratios follow a simple formula. Your debt-to-income ratio is all of the money you owe each month divided by your monthly income. In general, a lender does not want to see this ratio go over 43%, according to the United States Consumer Financial Protection Bureau, but lower is better.
Basically, this is the lender/mortgage company checking to see if you make enough money to cover your potential mortgage. This is an easy number to lower if you have cash on hand beyond your needs for a down payment. Your can lower this ratio by paying off credit card debt (which helps your credit score), paying off any car loans, or settling any other monthly debt you may have.
Have your paperwork ready
Back before the housing bubble burst in late 2006, no-documentation and low-documentation loans were common. Now, most standard loans require a pretty standard set of documentation with little wiggle room.
In general, this includes two current pay stubs (representing a month of earnings) for each borrower, two months of bank statements from all bank accounts, two years of taxes, and documentation on any large amounts of money moved in and out of your accounts. That means you might need a letter from your human resources department explaining a bonus, or one from your grandmother detailing that a gift toward a down payment does not have to be repaid.
Most of these documents are easy enough to come by, but some take a bit of time to acquire. For example, you'll need to show any retirement accounts you have, and if you haven't been saving your statements, some of those companies will only mail statements, so it can take a few days.
All of these documents are easy to access, but having them at the ready makes the mortgage process go much faster. It's also a smart idea to put these together before starting an application for a mortgage, because in general, not having a key document can stop the process dead in its tracks until you supply it.