Failing to plan is planning to fail
So you plan on applying for a mortgage in six months. You’ve tons of time, haven’t you? Haven’t you?
Well, no. Think of applying for a mortgage as like running a marathon: The better your preparation, the better your result will be — and the easier time you’ll have.
10 ways to get in shape for a mortgage application
1. Correct credit reporting errors
This isn’t a chore you can ignore. Errors on credit reports are common. And they can significantly affect a credit score (and therefore a mortgage application) if uncorrected.
You’re legally entitled to a free copy of your credit reports each year. You need one from at least each of the three big credit bureaus: Equifax, Experian and TransUnion.
Those companies have set up the AnnualCreditReport.com site as a one-stop shop to access all three. But get in early: In spite of recent improvements, plenty of consumers still complain it can take them many months (or longer) to secure corrections.
2. Improve your credit score
Arguably, nothing is more important to your mortgage than your credit score. Pushing your score up can mean the difference between your application being accepted or rejected.
And, even if that’s not an issue for you, a small improvement can see you offered a better mortgage rate. There are two main things you should do:
- Carry on paying all your bills on time.
- Make sure you get your card balances below 30 percent of your credit limits — and keep them there.
Add to those a third…
3. Don’t open or close credit accounts
FICO provides the most widely used types of scoring technologies. And 15 percent of your FICO score depends on the length of your credit history.
That includes how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts.
So opening a new account or closing an old one could pull down your score. And there’s another reason opening new accounts could harm your mortgage application…
4. Cut your debt
Rivaling your credit score’s influence on how good a mortgage deal you get is your debt-to-income (DTI) ratio. That’s the proportion of your monthly income that goes out on servicing your debts.
And, for DTI purposes, “debts” include:
- The monthly payment on your new mortgage
- Other regular housing costs, such as property taxes, homeowner’s insurance and homeowners’ association fees
- Minimum credit and store card payments
- Other loan payments, including those on student, auto and personal debt
- Alimony and child support
Clearly, piling on more debts in the months leading up to your application would be folly. Meanwhile, reducing your debt burden could help you qualify for a better mortgage rate.
5. Save a bigger down payment
Depending on the type of mortgage you choose, you need a down payment between 0 percent and 20 percent of your purchase price.
If you make a bigger down payment than is needed, you could earn yourself a better deal. Meanwhile, the amount you put down could also affect how much you pay in mortgage insurance.
6. Save a bigger emergency fund
It’s obviously good to have a worthwhile cash cushion that allows you to cope with unexpected emergencies. Once you’re a homeowner, you have no landlord to turn to when your roof starts to leak or your HVAC goes on the blink.
But that big cushion can also impress your mortgage lender. It provides reassurance that you won’t default when the going gets tough.
Pay down debt, put money away for a bigger down payment, save toward a bigger emergency fund … yeah, right.
Unless your name’s Walton, Koch or Mars, you won’t get to do all those. At least, not in six months. So prioritize. Identify where you have weaknesses, and address those.
8. Behave for your bank
Your lender is going to look at your recent bank statements. And it won’t be impressed if it sees a pile of non-sufficient funds (NSF) fees. So keep your checking account in the black.
Sometimes NSFs occur through no fault of yours. If that’s the case, warn the lender upfront, and provide a detailed explanation.
9. Get your paperwork together
It may be 180 days off, but someday soon you’re going to sign a mortgage application. And you’ll then be expected to provide a whole pile of documents to support your every assertion.
Don’t wait until you’re asked to begin pulling together all that paperwork. If you’re not obsessive about filing, you may need to get copies of lost documents and to spend hours rifling through stacks of papers.
Avoid the stress of doing that under pressure. And the risk of delaying your application while you obtain copies. Start now.
10. Be nice to your boss
It’s probably okay to switch jobs in the run up to a mortgage application — especially if you’re staying in your current line of work, and stand to earn more.
But don’t do so hard up to closing. Your lender’s going to want to re-verify your employment. And it’s likely to require at least 30 days of paystubs from your new employer.
Don’t risk delaying closing!
Those six months are going to fly by. Getting your act together now should save you stress and maybe even panic later. And, if you shift your credit score up or your DTI down, you stand to save thousands over the lifetime of your loan.
What are today’s mortgage rates?
Today’s mortgage rates are extremely inviting for homebuyers. But to get the best rates, you need the strongest application you can come up with. Take the next six months to get yourself in a winning position. The money you save over the next 30 years will make it worth your while.