by Maurie Backman | Updated Sept. 15, 2021 - First published on Dec. 7, 2020
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Applying for a mortgage can be daunting. But if you make these key moves before applying for that home loan, you’ll be more likely to get approved. Plus, you'll likely snag a competitive interest rate -- and make homeownership easier on your wallet.
Your mortgage application process will be smoother if you have the right paperwork on hand from the get-go. To this end, gather a few recent pay stubs, as you’ll need that information to prove your income level. You’ll also need a copy of your most recent tax return and bank statements to show that you have money available to pay your mortgage if you lose your job.
If you're self-employed, you'll need additional documentation. Check out our guide to getting a mortgage while self-employed for more information.
Each of the three major credit bureaus maintains a report summarizing your credit history and activity, and you’re entitled to a free credit report every year. Request one, and review it thoroughly for mistakes before getting a mortgage.
Errors on your credit report could hurt your chances of getting approved for a home loan. Correct any credit report mistakes, and you’ll be more likely to get the financing you want.
What sort of error might your credit report contain? It’s possible for a debt incurred by someone with the same name as you to get associated with your file. That could turn into a problem, so it’s something you’d want to get fixed.
One factor mortgage lenders look at when deciding whether to approve applicants is their debt-to-income ratio (DTI). This measures your total debt relative to your earnings. If you pay off a large chunk of your debt, you'll improve your odds of getting a mortgage.
Paying off debt could also help boost your credit score. Your credit utilization ratio is a big factor in calculating a credit score. This is the extent to which you're using your available credit. Getting rid of debt means you're using less of your available credit, which brings up your credit score. And a high credit score is an important factor in getting a mortgage.
Taking on new debt has the opposite effect of paying off debt. Your score may or may not take a hit, depending on how much new debt you acquire.
Generally speaking, you’re better off waiting to finance new purchases until after your mortgage is already in place.
Many new homebuyers make the mistake of taking on too much housing debt and regretting it after the fact. Remember, the mortgage amount you’re approved for isn’t necessarily the amount you should actually borrow. If a bank offers a $180,000 mortgage but you can only afford to make payments on a loan worth $150,000, stick to that lower number.
Wondering how much your monthly payments will be? Use our mortgage calculator to estimate monthly mortgage payments associated with different sizes and types of mortgages. We also have a handy calculator to see how much house you can afford.
Ideally, your predictable housing expenses shouldn't exceed 30% of your income. That includes your mortgage payments, property taxes, and homeowners' insurance. Keep this threshold in mind when you sign your mortgage and commit to its monthly payment.
The more strategic you are going into your mortgage application, the more likely you are to get approved for a home loan with a reasonable interest rate. It may take some time to check these important items off your list, but it’s a worthwhile investment.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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