It’s thrilling to search for your first home. Be that as it may, most first-time homebuyers need a home loan to buy a house. You’re likely stressed that you will be turned down for a home loan due to low FICO scores.
Luckily, by teaching yourself the home credit process, you will be in better position to get a mortgage at improved interest rates. Despite the fact that purchasing a home can be confusing and complicated depending on your financial history, there are a few things you can learn NOT to do to when applying for a home mortgage.
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Things You Must NOT Do Before Applying for Your First Mortgage
Home purchasers regularly commit mistakes that ruin their odds of getting a mortgage, or a loan at great interest rates. It’s critical to get your finances in order at least six months prior to looking for or applying for a mortgage.
Everything that you from your employment to spending money to taking a test drive will affect whether you can qualify for a home loan.
1) Remember to Check Your Financial Health
When you apply for a home mortgage, I’ll need to investigate your financial history through a credit pull. This includes salary, debt obligations and assets. Check your credit report from all credit bureaus at AnnualCreditReport.com free every year to discover errors, mistakes and accounts opened without your knowledge.
Any errors on a credit report can bring down your FICO rating. Do whatever you can to improve your financial situation before you apply.
2) Don’t Increase Your Debt Further with Big Purchases
Your house is likely to be the greatest purchase you will ever make. As your home loan lender, I must follow ability to repay laws to make certain you’re a great candidate to pay back your loan. In the event that you make a major purchase, for example, a new vehicle, boat or other expensive recreational vehicles right before you apply for a home loan, you may throw your debt to income ratios off to the point it will prevent you from qualifying.
Gearing up to reach your goal of home ownership, you should focus on reducing your overall debt, keep your credit cards around 30% credit utilization (i.e. don’t go over $3,000 of a $10,000 limit), maintain on-time payments and maintain your employment / income.
Your debt to income is the amount of your monthly debt payments compared to your monthly income. The higher your debt to income is, the less loan (if any) you’d qualify for. Remember, we have to account for your current debt and your NEW debt (the mortgage) into our calculations.
3) Never Apply for a New Line of Credit
Generally speaking, it’s never a good idea to apply for new credit accounts when you are leading up to a home purchase that will need a mortgage. You DEFINITELY do not want to make any sort of credit inquiry after you submit your mortgage application. Before your application, these inquiries can damage your FICO score and during your mortgage, it may halt your clear to close as the underwriters may demand investigation into the inquiry.
4) Don’t Spend Any of Your Savings
Mortgage lenders like to see savings, retirement accounts and other assets. Although 100% financing may be available, you still need to prove your overall ability to repay. Savings helps as a compensating factor during loan consideration.
Another thing worth mentioning, you may find a more favorable loan is available to you if you can come up with 3.5% down and some closing costs. Overall, depending on your loan program and your financial history, will need to see some savings that will cover your mortgage lending costs and down payment. We also need to see that you are able to maintain your mortgage payments and have a plan for sudden costs like appliance failures, HVAC repairs and more.
5) Don’t Co-Sign Any Loans
Remember, any loan on your credit report will count as a payment you are responsible for. Therefore, if you co-sign a loan, like a car payment, we have to consider that minimum monthly payment as part of your overall debt-to-income even though that money may be coming from a family member on that payment.
Should that co-sign default on their loan, you are also responsible for paying off that default. Most likely, that default would need to be settled before you could purchase a home.
6) Don’t Max Out Your Credit Cards
Utilizing your whole credit limit will increase your overall debt-to-income ratio. Overall, it is good practice to keep your spending on revolving credit accounts to 30% of the overall credit limit or lower.
If possible, it is better to keep all loan accounts as low as possible or paid off. The lower debt you have, the more mortgage you’d likely qualify for within the guidelines we must follow.
7) Try not to Close Any Credit Accounts
You shouldn’t close any credit accounts you have, regardless of your usage of those cards. By shutting down a credit account, you will likely increase your overall credit utilization which may affect your overall FICO scores.
The higher your credit utilization, the more you may be seen as a risk. Keep your credit balances predictable and as low as possible.
8) Prevent Late Bill Payments
Take care of every one of your credit card accounts. Consider setting up auto-pay for at least the minimum payment. In certain circumstances, a single or multiple late payment occurrence on your loans can impact your ability to qualify for a mortgage.
9) Avoid Major Life Changes
Keep up your existing lifestyle during your application process. Don’t make drastic, significant life changes that could influence your salary, savings accounts or FICO rating.
For instance, don’t change your employment or take a leave of absence. Mortgage lenders need to see steady, long-term employment, generally in the same line of work. Choosing to have a baby, quitting your job, going back to school or quitting everything to start a new business will likely damage your chances. Most loan programs require 2-years tax returns for self-employment income.
Overall, making major life changes will increase costs and will likely reduce your savings.
10) Don’t Deposit Large Amounts Without Proper Documentation
Large deposits must be documented.
Any large deposits made during your most recent two bank statements will need to be documented and classified as acceptable. Please refer to Fannie Mae’s guidelines here.
As an example, you are allowed to receive gift funds towards your 3.5% down payment under FHA guidelines. We would need a letter from the qualified source of those funds stating that the money is a gift without expectation of repayment. With that letter, the funds would then be documented and may be used in your home loan.
For loan program specifics, please contact me directly to discuss. Each loan program has different guidelines we must follow and I’d be more than happy to assist you!