When applying for a new mortgage, there are five factors to keep in mind that make the application process simpler and give you a better chance at pre-approval or approval for the amount you wish to borrow. Many people find at least one item in this "top five" list that needs attention, but with some planning and discipline, those who seek a new mortgage can take much of the guesswork out of the process.
Rule one: Start early
The earlier you start preparing to take out a loan for your new mortgage, the better you will be. Do you know what potential problems you could encounter when applying for a new line of credit? Do you know how long it may take to fix them? What is your employment history? If you are planning on changing jobs or careers, it is important to know how changes in your employment history may affect your chances for a new mortgage.
Many people start preparing by getting mortgage advice and researching these issues at least a year in advance. There are plenty of good reasons to start this early, especially if you are worried about your credit worthiness and how it could affect getting the amount you need for a new mortgage.
Rule two: Know your credit report
Your lender will request your credit report from one of three major agencies; TransUnion, Experian, or Equifax. Do you know what your lender will see when the report comes in? This is one of the main reasons why it pays to prepare early. Your credit report may contain erroneous, outdated or misleading information. By requesting a copy of your credit report from the three major agencies you can correct errors and contest inaccurate data on your report that would otherwise harm your chances at getting a new mortgage in the amount you need. Getting a hard copy of your credit report may take additional time, it's best to take this step as early as possible if you need the hard copy rather than an online version.
Rule three: Make payments on time
When applying for a new mortgage, your lender wants to see proof that you are a good credit risk. This includes paying off your credit in a reasonable amount of time and making on-time payments. A good rule of thumb to follow: Make all payments on time for at least one year. This establishes your reliability. Do you have trouble paying on time because of time constraints, business travel or other concerns? Set up auto-deduct or an ACH withdrawal payment wherever possible to decrease the likelihood of missing a payment or sending it in after the due date.
Rule four: Be aware of your debt-to-income ratio
When you fill out an application for a new mortgage, the amount of income you have is compared to the amount of debt that you owe. There are two basic types of calculations—a "front end" and "back end" ratio. The front end is calculated by how much income you have vs. how much a new mortgage loan would cost. Your lender usually considers a loan amount between 29% and 33% of your monthly income as a reasonable payment.
The back end calculation is how much your new mortgage will cost when added up with the rest of your debts. Depending on the type of loan, your debt-to-income ratio can be as high as 45% or more and still get approved. But this varies from lender to lender. A general rule: The better your debt-to-income ratio is, the better your chances at getting approval on your new mortgage loan.
Rule five: Be aware of unnecessary lines of credit
Your debt-to-income ratio can be affected by both your current debt and expected debt based on your credit limits. If you have four credit cards with a $10,000 limit per card, your potential debt is $40,000. Even if you only carry a balance of $200 between all four cards, that additional potential for debt can potentially hurt your credit application.
However, closing old and/or unused accounts is not always the best decision. General rule: Know your lines of credit well and analyze each one closely before deciding whether to keep or cancel any one of them.
By paying attention to these five factors, you can greatly increase your chances of getting the loan amount and interest rate you want. Remember, lenders offer the most competitive interest rates to borrowers who present themselves as a good risk. Start early and prepare yourself; your journey to a new home will be less stressful and time consuming.
