Even though the U.S. housing market is transitioning from a seller’s market to a buyer’s market, banks and mortgage lenders continue to have tight mortgage lending standards for potential home buyers.
A borrower’s credit score and credit report continue to play a significant role in whether their loan is approved or not in today’s market. So, in light of today’s lending standards, remember these seven rules if you’ll be applying for a mortgage in the near future:
- Clean up your credit history. A few months before applying for a mortgage, review your credit report and check for any discrepancies. You can access your credit report from all three credit reporting agencies once a year for free at annualcreditreport.com.
- Have your bank accounts in order. Mortgage lenders will want to review several months of your banking activity; especially from the account from which your down payment is coming from. The money you’ll be using for your down payment must be well documented. It cannot appear out of thin air into your account. They’ll need to see if it was accumulated/saved over time or given as a gift from a relative or close friend. If it’s a gift, then the giver will need to write a formal letter stating that this is the case.
Additionally, if you are contemplating applying for a mortgage within the next six months or so, make certain your bank accounts don’t reflect any untoward activity such as non-insufficient fund (NSF) transactions. If they do, NSF transactions will negatively reflect on the reviewer of your mortgage application and could hurt your approval chances.
- Pay off as much of your credit card debt as possible. Many lenders will prefer if you do not have large amounts of credit card debt or open lines of credit. If you have a several credit cards with no balance and they are active with the potential for future purchases, don’t be surprised if the lender mandates that you close some of these accounts in order to be approved for the loan.
- Don’t become house poor. Be realistic about how much house you can afford. Plan to borrow roughly 2 to 2-1/2 times your annual gross salary. In these uncertain times, if you’re buying the house with another person, you’d be wise to take on mortgage payments that can be supported with one income (including taxes and insurance).
- Know the 28/36 ratios rule. The majority of lenders will back a buyer whose monthly house payment will not exceed 28 percent of their gross monthly income. Lenders also prefer the borrower’s overall debt ratio to fall below 36 percent of their gross monthly income.
- Use a down payment. Aim to put down 20 percent on your home purchase so that you can avoid paying private mortgage insurance.
- Get pre-approved. Try to be pre-approved for a mortgage before your home search begins. That way you’ll be able to better focus on the best potential home in your price range and give yourself one additional competitive advantage should you decide to make an offer.