It’s natural to be nervous about applying for a mortgage. After all, your loan officer will ask for plenty of documentation to verify your income, savings, debt and job status. You’ll have to explain any recent large deposits into your bank account. And your lender will study your credit history carefully, poring over every financial step—as well as missteps—you’ve made.
But we’re here with some good news: The mortgage process isn’t nearly as scary as you might believe.
Yes, you will have to provide lots of paperwork to your lender—such as copies of your last two paycheck stubs, last two years’ worth of tax returns and last two months of bank account statements. But lenders only ask for this information because they want to ensure you can afford to pay back your mortgage on time each month.
If you want to make the mortgage process move as smoothly as possible, and if you want to dramatically reduce your risk of a loan rejection, take the following steps before you even apply for a loan:
Develop a history of paying your bills on time: Certain payments, such as those you make on your auto loan, credit card bills, student loans and, once you have one, mortgage loan, are reported to the three national credit bureaus of Equifax, Experian and TransUnion.
If you pay all your bills on time, your credit reports will reflect your good payment history and this will result in a higher three-digit credit score.
The higher that score, the better. Lenders reserve their lowest interest rates for borrowers with high scores. If your score is 740 or higher, you can expect a low interest rate and smaller monthly payment on your home loan.
Pay down your credit card debt: Having too much credit card debt can hurt your credit score. Before you apply for a mortgage, pay off as much of your credit card debt as you can. The lower your debt, the better your chances are of qualifying for a lower interest rate.
Figure your debt-to-income ratio: This ratio is another key number when you’re applying for a mortgage. Take a look at how much of your monthly income your monthly debt requirements consume. Lenders want your total monthly debts, including your future estimated mortgage payment, to equal no more than 43% of your gross income (your income before taxes). Before you apply for a mortgage, make sure that you’ve either boosted your income or cut down your monthly debt so that your ratio is below this percentage.
Review your credit reports: Every year you can get one copy of your credit report for free from the credit reporting agencies of Equifax, Experian and TransUnion at www.AnnualCreditReport.com. Do this, and then study those reports. They will list any missed or late payments and any negative financial information, such as bankruptcies that are up to seven to 10 years old and foreclosures that are up to seven years old.
If you see any mistakes on your reports, contact the credit bureaus immediately. Repairing a mistake can boost your credit score significantly.