Things to Improve Before a Mortgage Application

Home ownership doesn't have to be out of your reach.

Home ownership doesn't have to be out of your reach.

When lending standards are relatively strict, the goal of home ownership may seem out of reach. With careful advance planning, however, it is possible to develop a financial strategy that will lead you in the right direction toward qualifying for a mortgage and lower the cost of the loan. The key to successfully securing a mortgage loan is the preparation before you begin shopping for a home.

Credit Score

Prior to applying for a home mortgage, request a copy of your credit report from the three major credit-reporting bureaus -- Equifax, Experian and TransUnion -- along with your credit score. Your credit score usually is the first place a lender looks when reviewing your loan application. The higher your credit score, the better your chances for getting a loan and at less cost. Money Magazine points out that increasing your credit score from 720 to 760 can lower your interest rate by a quarter of a percentage point. If any errors appear on your credit report, contact the creditor directly or file a dispute. Pay all your bills on time and avoid opening new lines of credit for at least six months before applying and until after closing.

Debt

Credit scoring systems factor in your debt-to-income ratio when calculating your credit score. Lenders take a close look, too. According to Kiplinger, you should keep your monthly consumer debt payments below 36 percent of your monthly gross income. Your monthly housing costs alone should not total more than 28 percent of what you earn. Housing costs include principal and interest payments, homeowners insurance and property taxes. Pay down debt, particularly high-interest credit card debt, before talking to lenders. Reducing how much debt you owe will raise your credit score. Aside from keeping your debt low, increasing your personal assets in the form of life insurance policies, retirement savings and other investments can improve your standing with a lender.

Cash Flow

When you apply for a loan, a lender looks to see that you have regular income. Be prepared to show your last month’s worth of pay stubs, and tax returns and Forms W-2 for the past two years. If you are self-employed, a lender will want to see your profit and loss statements in addition to your tax returns. Considering that self-employed individuals can have a difficult time getting a loan, increase the income you report by not taking as many business tax deductions. You will pay more in taxes, but the trade-off can be worth it in the end. Another way to show that you are prepared for the future is to build an emergency savings fund. Having quick cash at your immediate disposal should an unexpected emergency occur will give you the ability to continue to meet your monthly expenses until your situation improves.

Down Payment Savings

Besides significantly increasing your chances of qualifying for a mortgage loan, saving more money for a down payment is a sure way to build equity in a home from the beginning. Putting more money down will also give you a lower mortgage payment, reducing the strain on your monthly budget. In general, most lenders require a down payment of 20 percent of the price you are paying for the home. Lower down payment options are available, but the loan will cost you more. Not only will you have to pay a higher interest rate, you will have the added cost of private mortgage insurance. Save up for a down payment by putting money in a high-interest savings account, investing in a short-term money market fund, purchasing short-term certificates of deposit or working a second job for a while.

About the Author

Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.

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