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In July 2021 alone, more than 700,000 new home sales were processed. While that sounds like a lot, the number is lower compared to 2020, due in part to a housing shortage. Pair that shortage with plenty of people looking to make a home purchase and you have a competitive market in 2021 and beyond.
You might think that these are just numbers—but understanding the housing market is pivotal to the mortgage approval process. If you’re considering buying a home, we’re here to guide you through the mortgage process. Get ready to be set up for success.
In This Piece
Understand Your Credit History and Score
The home loan approval process includes a pretty thorough credit check. While you might be able to get approved for an FHA mortgage loan with a credit score as low as 500, most traditional mortgage loans require at least a 620 or higher.
While your credit score might make or break you at the beginning of a mortgage application process, once you continue the process, your entire credit history becomes important. Mortgage lenders look at issues such as delinquencies or open collections accounts on your credit history. They may also require that you make good on any open collections accounts before your mortgage approval can go through.
It’s a good idea to understand your credit history and score months before you plan to apply for a home loan. That way, you have time to resolve any issues or dispute inaccurate negative information that could be dragging your score down.
You can get a free credit report from each of the major credit bureaus at AnnualCreditReport.com. You can also sign up for services such as ExtraCredit to get ongoing access to your credit reports and scores. ExtraCredit also includes features such as Build It that help you work on building your credit so you have a better chance at getting the mortgage loan—and rates—you want in the future.
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Prepare Your Personal Finances for the Home-Buying Process
Your credit isn’t the only financial factor that impacts your mortgage application process. Yes, your history of on-time payments to other creditors is important. But so is your ability to make payments on the mortgage loan in the future. Lenders are likely to be concerned with:
- Your debt-to-income ratio, or DTI. This is how much of your income you need each month to pay your existing debts. The lower this figure is, the better. According to the Consumer Financial Protection Bureau, most mortgage lenders won’t approve home loans that bring a consumer above 43% DTI.
- Your income. In most cases, you’ll need to demonstrate that you have the income or other financial means to make your monthly mortgage payments. Your income can impact how much you can get approved for or whether you’re approved at all.
- Your cash savings or other assets. If you need to make a down payment on your mortgage loan, you may need to demonstrate where that cash came from. You can get creative with sourcing your down payment within some rules, but you can’t always borrow it. And you can’t have cash show up in your account suddenly in the middle of your mortgage approval process without an explanation.
Understanding what mortgage lenders look at when considering you for a home loan could proactively help your case. Start early and work on reducing debt, increasing income and saving money for your down payment.
Decide What Mortgage You Can Afford
When you’re close to ready to start looking for a house and applying for a mortgage, take time to get an idea of how much mortgage you can actually afford. Start by taking a look at your budget—or create one if you don’t already have one.
Try to factor in expenses related to a new home, including savings for emergency repairs or maintenance. Once you know how much of a monthly payment you can afford, use an online mortgage calculator to test various loan and interest amounts. This helps you figure out your limits for home price, so you look for properties you can afford.
Research Potential Mortgage Options
Armed with knowledge about your budget, your credit and your overall financial status, hopefully you’re ready to do some research. Don’t apply yet—you want to apply for mortgages when you’re ready to make an offer on a home.
In the meantime, do some research. Talk to your bank, and maybe even reach out to a mortgage broker. That way, you’ll know your options and what you might qualify for.
Gather Documents to Apply for a Mortgage
During your research, make notes about what documents and items a mortgage lender requires for the application. Gather those documents and information before you apply for preapproval or a mortgage. You’ll save major time and hassle during the home loan approval process.
Some items you might need include:
- Identification, such as a driver’s license or other government-issued ID.
- Documentation of your income, such as paycheck stubs, W2 forms or tax returns.
- Documentation of assets, especially assets like savings or investment accounts that might be involved in sourcing your down payment.
- Your Social Security number for the credit check.
- Documents showing you paid or settled any collections accounts or other negative issues on your credit report.
You may be asked for other items or documents throughout the mortgage underwriting process. When you apply for a mortgage make sure you’re available via email or phone, in case lenders have extra questions for you.
Consider Getting Pre-approved for a Mortgage
Getting pre-approved for a mortgage can be a good step. Preapproval doesn’t mean you’ve successfully completed the entire mortgage approval process. However, it does mean the lender did a cursory review of your credit history and score—as well as any income information you reported—and is fairly comfortable saying you’ll be approved with a certainrate.
Preapproval letters let you shop more confidently for a home. They also help demonstrate to sellers that you’re serious about your offer and will probably follow through without financial hiccups. In a competitive market with numerous offers on each home, this can make your offer more attractive to some sellers.
Apply for Mortgages Within a Short Period of Time
Finally, once you’re ready to purchase a home, ensure you apply for mortgages within a short period of time. Each time you apply for a loan, your credit is hit with a hard inquiry—which will bring your score down a bit. But the credit scoring models treat multiple mortgage applications within a short period of time as a single hard inquiry, because it’s assumed you may want to shop around for a good deal.
You should also be ready for the prospect of being approved with conditions. This means the mortgage lender will approve your loan as long as you meet certain conditions, which could include:
- Providing supplemental documentation of credit history or income.
- Satisfying the lender’s requirements for copies of banking statements or other documents.
- Explaining an inconsistency or issue on your credit report.
- Settling an old collections account or other debt.
- Verifying where funds for a down payment came from.
Start Your Mortgage Application Process Today
Ultimately, being successful with the home loan application process comes down to being prepared and in good financial standing—or as in as good financial standing as you can. If you’ve gone through the above steps and are ready to apply for a mortgage, consider shopping for rates today.
Source: credit.com