Congratulations! After weeks of house hunting, you finally found the perfect home for your family, complete with a convenient location, lots of great amenities, a well-run HOA and an asking price that fits your budget. Time to break out the bubbly and toast your good fortune, right? Not so fast. Before you pop the cork, you’ve got one more hurdle to overcome – getting a mortgage loan.
Once upon a time (actually, before the recent housing bubble and recession), the mortgage process looked a lot different than it does now. Credit was easy and it wasn’t unusual to hear stories about folks with less-than-stellar credit histories and savings getting mortgages and buying homes. Well, as we all know, times have changed.
So if you’re planning to buy a home and need to apply for a mortgage, there are steps you can take to boost your credit-worthiness and make you an ideal prospect for lenders. We’ve got the scoop on how to get a mortgage loan, so read on for our top six tips to increase your chances.
1. Know the score.
Do you know your credit score? While many lenders will tell you that your credit score is just one of several factors that determine whether you’re a good lending risk, many still consider it the big kahuna. The most common type of credit score is the FICO score – the “Kleenex” of credit scores – which uses a 300 – 850 point range. There’s no magic number for qualifying for a mortgage, but according to the Ellie Mae Origination Insight Report
, the average FICO score for an approved conventional loan in July 2015 was 757, while the average denied score was 700. Generally, borrowers with scores over 760 qualify for the best interest rates, but even those with lower scores can still be in the game if they have other qualifications that lenders find compelling. If you don’t know your FICO score, you can pull it from the three credit bureaus, Equifax, Experian and TransUnion for a fee, or search online to find websites that provide credit scores at no cost. How do the credit bureaus determine your credit score? From the information contained in your credit report. Which leads us to…
2. Order your credit report.
Your credit report is produced by each of the three U.S. credit reporting companies, which compile information about your debts, loans and payment history. What’s included? Information about your current and previous credit cards, mortgages, loans (auto, student, personal) and other debt, including late and missed payments. If you haven’t seen a recent copy of your credit report, order it. Why? Because the information it contains is used to determine your credit score – and if you spot any discrepancies, you’re entitled to dispute them. Per Federal law, you can request a copy of your credit report from each of the three companies once each year for free – and an easy way to do this is through www.annualcreditreport.com. Just be aware, however, that your credit report does not contain your credit score – and the law does not require the credit reporting companies to provide credit scores at no cost.
3. Put more money down.
A decade ago, zero down loans were fairly common, and as we now know, may not have been the best choice for many borrowers. Today, a 20% down payment is typical, but even that is not a hard and fast rule. Lenders are often willing to work with borrowers who have a lower credit score, but can afford a higher down payment. The same can hold true for borrowers with the opposite qualifications – a great credit score, but less money available for a down payment. It’s the combination of factors that counts.
4. Reduce your debt.
Debt matters to lenders. As a general rule of thumb, your debt load, which includes home payments, taxes, insurance and debt from credits cards and loans, should not exceed 36% of your gross monthly income. Of course, the lower your percentage, the better, and many successful mortgage buyers have debt-to-income ratios that average about ten percentage points lower. So if you have high credit card, loan or other debt, it’s a good idea to pay it down as much as you can before you apply for a mortgage.
5. Just say no to new credit cards.
Every time you apply for credit, including loans or new credit cards, you lower your credit score. Each new application is reported to the credit bureaus, and when lenders see a large number of credit inquiries, especially right before you apply for a mortgage, they think you’re overspending – and that can affect both your odds for approval and your rate. There is one exception, however. If you have no credit at all, apply for a credit card as far in advance as possible – six months or more should do the trick. You’ll establish a credit history, and though the application will lower your credit score a bit, time will have passed by the time you apply for a mortgage. But make sure you apply for a card that you’re likely to be approved for – otherwise, you’ll be shooting yourself in the foot.
6. Give yourself the gift of time.
All of these actions take probably more time than you think – after all, you can’t have credit report errors corrected or save up for a down payment overnight. So if you’re thinking about buying a home in the near future, start taking these steps as far in advance as possible – six months or more, if you can.
So whether you’ve already found the perfect house or plan to start house hunting over the next few months, now is the time to start taking steps to make yourself as mortgage-worthy as possible – after all your dream home – and glass of bubbly – await. For more information, visit FirstService Residential, North America’s property management leader.