When the housing bubble burst, foreclosures skyrocketed and housing prices fell dramatically. The mortgage loan process also became considerably more complicated, so much so that applying for a mortgage today can seem Herculean compared to the process just five years ago. However, there are steps that potential home-buyers can take to streamline the process and maximize their chances of qualifying for a mortgage.
1. Check Your Credit Score
Your credit score will affect whether you qualify for a mortgage, as well as the terms of the loan itself. Experian, Equifax and TransUnion are the three major credit bureaus that report information about your credit and repayment history, and the Fair Isaac Corporation, or FICO, compiles the reports into easy-to-read credit scores that can range from 300 to 850.
The higher your credit score is, the more likely you are to be offered favorable loan terms and low mortgage rates. Those with scores below 620 may be considered subprime borrowers and could face more hurdles in their quest to own a home, as well as substantially higher interest rates. FICO scores below 500 may leave borrowers unable to obtain a mortgage at all.
Checking your credit reports and scores before going to a mortgage lender, and correcting any errors that exist, can speed the loan process once you apply. However, be aware that all inquiries need to be closed before the lender pulls your credit report since an open inquiry can significantly delay the mortgage process. Completing inquiries into any errors will also help ensure a more accurate report.
Although your FICO score factors heavily into your lender’s decision, it is not their only consideration. Borrowers with low credit scores may still be able to obtain favorable loan terms by having a low debt-to-income ratio or a large down payment.
2. Start Rebuilding Holes in Your Credit Report
Although your debts will most likely be listed on your credit report, you may opt to verify them by pulling statements for those as well. If you have filed for bankruptcy, you may need to copy the files associated with that bankruptcy and be prepared to explain your situation.
Bankruptcy can significantly hurt your credit score, but if you have been carefully rebuilding your credit since filing, your mortgage officer will be able to take that into consideration when making the final decision. Potential loan applicants can take steps towards rebuilding their credit, including updating credit card payments, upgrading to an unsecured card and tracking and correcting and credit report errors.
Do not be afraid to dispute your credit report if it is lower than you’d like; credit reporting agencies can make mistakes, and consumers can file reports through the Consumer Financial Protection Bureau.
3. Pay off Debts
When you apply for a mortgage, lenders will consider several different factors to determine if you are a good risk. Your credit history will play a major role in your ability to obtain a mortgage, but lenders will consider not just your credit history but also your current debts, your employment history and the amount of cash you have on hand to pay for your down payment, closing costs and other expenses associated with moving and home ownership.
Mortgage lenders will often measure your ability to pay by using front-end measurement, meaning if a significant amount of your income is going towards paying your monthly bills or debt, you may not qualify for a large loan.
4. Document Your Finances
When applying for preapproval or for your mortgage, you will need to supply several mortgage documents depicting your finances for the previous two years. Verify your income and employment history through tax returns and paystubs. Income from child support, alimony and other sources will need to be carefully documented as well. If you are self-employed, your lender may request a balance sheet, a profit and loss statement and corporate tax returns.
You will also need to obtain two to three months’ worth of statements from your bank to validate your assets. Include statements for your checking, savings and money market accounts. If you have investments or retirement accounts, you will need to include those statements as well.
5. Apply for Pre-Qualification
Being prepared before visiting a lender or mortgage broker will help you avoid frustrating delays or complications. Being pre-qualified or pre-approved for a mortgage before shopping for your house can also speed the process. Pre-qualification requires only general information about your current financial situation, but your lender will be able to use these numbers to provide an estimated loan amount. Pre-approval is more in-depth and will require more extensive information.
Your main question may be, “How soon can I move?” The time line from loan application to closing can vary depending on your personal situation and the type of loan you obtain. Most people can expect to close on their new homes between one and two months after signing their contracts. Becoming prequalified before shopping for your new home can help you identify and correct areas of concern, such as errors on your credit report, paying down debt and saving for a down payment.
This guest post was written by Ryan Devereux, a financial blogger who believes that the housing market’s recovery is central to the United States’ overall economic improvement. Mr Devereux partners with numerous housing-related employers, from general contractors to roofing companies.