Getting your mortgage loan approved is an important step in achieving your lifelong dream of owning property, so make sure you pay the utmost attention to a few things that - if left unchecked - could derail your mortgage application. These adverse elements include a high level of debt versus available cash, a large purchase in the weeks or months leading up to the mortgage decision, a lower down payment, incomplete paperwork, a tarnished reputation and lack of patience.
Pay Down Debts
Paying down your debts is an economically smart move, irrespective of why you are doing it. He who pays his debts gets richer, the saying goes, so try to reduce your liabilities as much as you can before pondering or even filing a mortgage application. This is especially important if your credit is imperfect or needs serious repair to justify the time, resources and energy that the mortgage underwriter would put into reviewing and processing your file. For you to beat the odds of being denied a mortgage, there must be a break in the lender's internal procedures that stops or at least reduces the time it would take for the company to reject your application. What I am saying, in a nutshell, is that you must pay down your debts, but that the odds of approval become slimmer if you have a low credit score.
Try to determine your total indebtedness by reviewing your credit file and diving deep into all your monthly statements – be they credit card, savings account and checking account. Figuring out the exact amount of your open loans is important to determine your debt-to-income ratio, which equals your total monthly payments divided by your monthly after-tax income. I would say that a ratio below 40% is acceptable, whereas something in the 60% or 70% range would get you very few mortgage acceptance letters.
Don't Make Large Purchases – For a While
The barrage of TV and Internet ads about continuous discounts and rebates and commercial savings and "first month free" packages may place mounting pressure on you, but don't fall for any of those commercial tricks and make a top-dollar purchase. If you're planning to purchase property, make sure the last three or six months of your credit file are debt-free because the prospective mortgage lender may view you as a high risk, deny your application or charge you an exorbitant rate. For example, say you have $20,000 in outstanding loans, and your debt-to-income ratio is 25% - a nice range that fits with the profile a mortgage lender seeks. One month before you applied for a mortgage, you bought a splendid 4x4 that cost $25,000. As a result, your outstanding loans went up to $45,000, but your credit score diminished because your debt-to-income ratio skyrockets.
Save Cash to Maximize Down Payment
One highly regarded finance professor once told me that a person who saves cash to maximize down payment takes the perfect steps to quickly repay the debt and remain financially independent in five to seven years. Come to think of it, she was right because there is a big difference when the mortgage lender disburses 75% (meaning your down payment equals 25%) versus when the bank doles out 40% or 50% - a difference you would see in higher annual percentage rate and monthly payments, for example. If you have a less-than-average credit score and a shaky economic situation, saving money and applying financial discipline could help boost your chances because the mortgage underwriter may say that you proved your resilience in the face of conditions that were very ripe for bankruptcy or personal default. He or she could therefore approve your mortgage application, thus rewarding the good behavior and intentions that made you forge, and stick to, a cash savings program.
Prepare Personal Documentation
Get your paperwork ready as you hop on the mortgage application train. Speak with your real estate agent or mortgage underwriter to figure out what types of documents are needed, for what periods and in what formats. Although the criteria may slightly vary from one lender to another, the basic documentation requirements touch on things like full legal name, phone number, address, date of birth and social security number. Other requirements include gross income, name and address of your previous and current employer, and federal tax returns for the previous two years.
As a mortgage applicant, you should have a good dose of patience and decorum when discussing your file with a bank's customer service representative. This is especially necessary if you are a first-time buyer, have an alarmingly low credit score, or have filed for bankruptcy in, say, the last three to four years. For a mortgage underwriter, your thrust into the "Mortgage Land" is a good thing because he or she will earn closing charges and fees if everything goes well. However, your application also may represent a higher risk that could create financial havoc in the lender's books if you later file for bankruptcy or face foreclosure.
Repair Your Credit
Your credit score generally gives a close-up view of the financial choices you have made in the past, why some of them fared very well while others flecked your creditworthiness, the types of outstanding loans you have, and your overall credit score. Don't believe those people who maintain the fiction that repairing your credit might not affect your credit score immediately. It certainly takes longer to clear certain types of credit, such as default and bankruptcy, off your credit file. But that doesn't mean you cannot wipe things like fraud and inaccurate items out your credit file. As a U.S. citizen or permanent resident, you are entitled to a free copy file once a year, according to the Fair and Accurate Credit Transactions Act (FACTA)
To get your mortgage loan approved, do your homework well in advance and speak with people versed in the intricacies of personal finance and real estate investments. Things you also can do include cleaning up your credit, being patient during the mortgage process, and building up a sizable cash position to pay off existing debts and maximize your down payment.