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Sunday, October 9, 2011
Top 10 Tips for a Timely Mortgage Approval
Biggest roadblock - Lack of knowledge about the mortgage process!
"Financial fears" accounts for top reasons renters are not buying!
According to Fannie Mae's National Housing Survey, financial fears are the top reasons given by renters for not buying a home. And yet new research suggests consumers don't know enough about their credit score and how it could affect the interest rate and terms they're offered.
It's clear that the lack of knowledge about the mortgage process is one of the biggest roadblocks for first time homebuyers. Buyers who prepare themselves financially before they start looking for a home will have a better chance of succeeding. These 10 tips will help first time homebuyers improve their chances of getting a mortgage and into the home of their dreams.
1. Pay down debt. Before you apply for a mortgage, reduce your total debt (monthly payments on credit cards, auto loan, student loans, consumer loans) to help reduce your overall debt-to-income ratios (DTI) and improve your credit score. Generally, your ratio should be 36 percent of your gross monthly income. Also, the total of your housing expenses alone, whether you are renting or buying, should not exceed 28 percent of your monthly gross income.
2. Clean up your credit. About half of all renters think they don't have good enough credit for a mortgage, but most don't really know. Obtain your free credit report from each of the three credit bureaus (Equifax, Experian and TransUnion) and carefully review them, noting all negative items. Contact creditors to correct inaccurate or outdated items. It will take time, but you need to raise your credit score to a minimum of 680 and ideally to 720 and above to qualify and to avoid being penalized with a higher rate of interest.
3. Make no new large purchases and don't apply for new credit before or during the period that you are applying for a mortgage all the way up to closing. Lenders check credit reports at the time of an application and again right before closing. Last minute questions about your credit can cause a delay, a higher interest rate, or a denial from a lender. Wait to buy the new furniture until the house is yours.
4. Increase your down payment. This will reduce the loan-to-value ratio and increases the likelihood of getting a loan and better terms from your lender. Increasing your down payment immediately increases your equity, reduces the amount you borrow, ultimately reducing your monthly mortgage payment. If you are in need of down payment assistance, more than 4000 local and state governments offer workforce house assistance for low- to medium-income buyers. Some require homeownership education, which can be very helpful. The following website matches programs to buyers: http://www.workforce-resource.com/
5. Gather documents beforehand. Don't wait until the last minute and find yourself having to scramble for paperwork that supports your employment status, assets and credit. Have all the necessary documentation ready for review when you apply. Collect your income tax returns, pay stubs, bank and financial statements, and student loan paperwork. Stay on top of your documentation as time passes while your application is pending, and get updated documents, such as pay stubs, to your lender.
6. Anticipate closing costs. Closing costs, which can run 5 to 7 percent of your total transaction, add up quickly and must be paid in cash — in addition to your down payment. Be prepared to have adequate cash on-hand. You can review estimated closing cost via a good-faith estimate before making an offer on a home.
7. Determine the type of loan you need. Fixed rate? Adjustable? FHA or VA? 15 or 30-year term? Jumbo? Second trust? These decisions aren't just financial; they also reflect your lifestyle, your risk tolerance, and the programs for which you might qualify. Do your homework and make a decision before you go house hunting. Don't let someone talk you into a different game plan to stretch your finances to afford a particular property.
8. Ignore "bait rates." Some mortgage advertising can be misleading with low rate promises. Beware. These "bait rates" are only for those with extraordinary credit with no contingencies. Your rate will be based on many factors: your credit, your debt-to-income and loan-to-value ratios, the size and type of your loan, where you live and the day you lock your rate, etc. You won't know what your rate will be until your application is accepted. By then, it may be too late for you to find a competitive rate from another lender. Instead, pick a lender you trust, who will work with you and help you find the best all-around deal.
9. Negotiate a lower home sales price. Getting a better deal on your home not only works for you, it works for your lender because it lowers your loan-to-value ratio. Prices are still falling in many markets and sellers are eager to make a deal. If you're not sure what a property is worth, you can ask your Realtor for a comparative market analysis. You can also visit Realtor.com to check property values. It's still a buyer's market, so negotiate a deal.
10. Have a cash reserve. A good rule of thumb is to have at least three months salary saved as a cushion before you buy. This will help with your ratios and enable you to afford and cover closing costs. If you want to be in a position to land the best mortgage that fits your needs, start early, educate yourself on your financial situation, get your documentation together and find a lender you trust.