While those seeking to refinance need to know the items they should have in good standing before moving forward, equally important are the items for those interested in buying a home. There are a few steps you can take to ensure your application for a mortgage will be bumpy-free on the road to home ownership.
With guidelines for home loan eligibility tighter than they were a few years ago, it’s helpful for consumers to know what to expect before submitting a mortgage inquiry or making an offer on a home. Don’t wait until you find the right home to discover that an area of your financial portfolio may be holding you back. Lenders will examine your income, assets, credit and debt to determine your ability to responsibly handle a monthly mortgage payment. So why not examine these for yourself?
Income: Gather all of your documents such as tax returns for the past two years, W-2 income statements and your two most recent pay stubs to show employment and compensation stability. Have your recent bank statements handy, as well as the latest total of your investments. If you are divorced, supply your divorce decree and if you pay alimony or child support, have those documents available as well.
Assets: Do you have money set aside for a rainy day? Is your paycheck only paying the bills leaving no money to pay yourself in the form of savings or retirement plans? It’s imperative that you can illustrate the ability to handle a mortgage should an unexpected event occur, such as a hospital stay or loss of employment. This is done with proof of assets such as a checking account, savings account and retirement funds. Having several months of PITI (principal, interest, taxes and insurance) easily accessible in the event of a crisis is critical for loan approval.
Credit: Not only is it important to have a credit score above 620, it is necessary to review your entire credit profile to ensure there are no errors in the report. Does it say you were late on a payment but you’ve always been on time? Do you have a common name that may allow for someone else’s account behavior to reflect on yours? If you’re John “senior,” is your son John “junior’s” credit history crisscrossing with yours? Errors like these can harm your credit unnecessarily and can affect the types of loan programs you can obtain. You can request a correction by contacting the three main credit bureaus, Experian, Equifax and TransUnion.
If you have no errors or late payments on your profile but your score is still not strong, take a look at your available credit. Meaning, it’s best to have three open trade lines that illustrate your ability to pay and on time. If you have less than three, consider opening a credit card that you will use responsibly. Conversely, if you have too many credit cards, try to keep only the ones you use most often. If you have a card associated with every department store but rarely use them, you essentially have credit with no activity.
Debt: Debt-to-income ratio (DTI) is the percentage of your monthly gross income that goes toward paying debts. Lenders like to see a DTI ratio that is less than 36 percent, so the lower your ratio, the better your chances are for a loan approval.
If you possess several credit cards, try to keep your balances no greater than half of your credit limit, as this can adversely affect your credit score.
Take advantage of free resources that are available such as Quizzle, to help you manage your money, home and credit score all in one place. Researching your financial situation now will make buying a house a smoother transaction when you find the perfect place to call home.
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