American entertainer Pearl Bailey once said that “the world needs more love and less paperwork.”
It wouldn't surprise MainStreet if Pearl said that after buying a house.
Though the task is daunting, if you plan ahead, know what to expect and know what you’re doing, applying for a home mortgage doesn’t have to be the financial and organizational equivalent of root canal.
These six guidelines are designed to put you down the road to mortgage approval success:
1. Start early. To borrow a phrase from Thomas Edison, a successful mortgage approval process is one percent perspiration and 99 percent preparation. That’s why it is important to start early – way early. If you plan on buying a home in July, give yourself six months to complete the loan process by starting in January.
2. Do your loan homework. Know early on what type of mortgage loan you’re applying for, and what costs you’ll incur in the course of the application. Fixed rate mortgages are your best bet – they lock in a loan interest rate and your loan payments won’t change over the course of a loan (usually 30-years, although 15-year loans, with higher monthly payments, and lower total debt, are also an option). In recent years, adjustable-rate and interest-only mortgages have come under fire by consumer advocates who caution that while you might enjoy smaller monthly payments in the short-term, those payments will eventually balloon to unworkable levels.
3. Check your credit. Check your credit report to see that there are no surprises. Use AnnualCreditReport.com, a free credit report web site established by the three major credit report providers, Experian, Equifax, and Transunion.
Keep you credit score in check by avoiding big credit card purchases before and while you are engaged in a mortgage application process. Banks and other lenders view your credit rating as the key determinant in awarding home loans. Taking on more debt could change your credit score, resulting in a potentially higher interest rate.
4. Pre-qualify. Get ahead of the game by getting pre-qualified for your home loan. That will give you an idea of how much house you can afford, and a leg-up on getting a loan approval. Your potential lender will ask about your income, assets and credit. Just don’t confuse pre-qualified with being pre-approved. The latter means you actually have a loan in hand, while being pre-qualified means you’re in the game, but haven’t scored a loan yet.
5. Get your documents in order. To complete your mortgage application, you’ll need to produce the following documentation:
- A purchase & sale agreement. Copies are fine.
- "High priority” mortgage information, especially estimated monthly payments, tax documents, pay stubs (two or three) and bank and investment statements. Be prepared to list previous residences, going back seven years. For tax records, copies of returns for the past two years is usually all that’s needed.
- Work/employment history going back two years.
- Any debt, as in credit card, automobile, student loans, etc. Again, be prepared. Banks will be looking for outstanding balances, and they won’t like it if you have more than 10% of your projected loan amount tied up in debt.
- Your Social Security number and your spouse’s number, if applicable.
- Information regarding alimony or child support. Sometimes divorce information isn’t required, but in these days of tight credit, it could come up.
Do not make the mistake of overstating income or any investment assets. Likewise, don’t underreport debts. Lenders will find out and will be quick to reject loan applications that aren’t on the up and up.
6. Complete your mortgage application. It doesn’t take too long to fill in a mortgage application, as long as you have the proper paper work handy. Like any piece of business correspondence, check for grammar or spelling before you submit. Also, double-check and make sure your numbers are spot on. Plenty of mortgages have been ruined because of bad numbers.
With your loan application in hand, submit it to your bank or lender. Be patient, the entire process can take two weeks or longer. If your mortgage application is rejected, don’t throw in the towel. By law, the lender must tell you why you were turned down. Usually those reasons involve credit issues, the size of your down payment, or that the home appraisal didn’t warrant a sizeable loan. Some of these issues are fixable: Your best bet is to re-arm yourself with new information that bolsters your case and meet with your lender to make your pitch.
If your mortgage application is approved, you’ll receive an approval package and a check for your new home. It’s an often long and exhausting process. But well worth it and highly doable if you’re patient and prepared.
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