By: Cheryl Lock / Mashable.com
Deciding to buy a new home is a big decision that comes with a lot of responsibility, and it all starts with applying for a mortgage, which can be a bit daunting.
In fact, two-thirds of people who are currently searching for home financing say they feel overwhelmed by the amount of information available on the topic, especially if they are under 30 or first-time home buyers — 76% of first-time buyers said they felt overwhelmed, compared with 54% of repeat ones.
While there's a lot of advice out there on where to look and what to do when it comes to finding and applying for a mortgage, it's also true that too much information can sometimes be a bad thing. We consulted experts to whittle it down to the eight best things you can do to get your finances in shape for a fast mortgage qualification.
It really can be as simple as the following steps.
1. Don't maintain high credit card balances
Underwriters flag balances on your credit report that are over 50% of the credit limit, and they will ask you about it, especially if it's close to the closing date, says Pamela Capalad, CFP.
2. Do a little research
Home ownership councils can help provide expert advice on buying a home, and can help explain loan options and develop a budget that's right based on the individual buyer's needs. "In fact, home buyers who undergo housing counseling see an average increase in borrowing power of more than $7,000," says Mary R. Kenney, executive director of the Illinois Housing Development Authority.
3. Get your down payment in order
Lenders want to see that you know where your down payment is coming from, and that you've had the forethought to be thinking about that lump sum in the months leading up to your application. "[Have a] down payment in your personal bank account for at least 60 to 90 days," says Leisa Peterson, CFP, founder of WealthClinic.com. "If you are buying a home, you really need to think about where your down payment is coming from, and know if you need 10% or 20% for the home purchase, and you need to be able to show that money before you apply."
4. Prove you have a consistent income
The best-case scenario would be proof of consistent income for at least the past 12 months, but 24 months would be preferable. "[Shoot for] a total debt-to-income ratio of less than 38%," says Peterson. "All lenders look at this differently, but the ideal is a debt-to-income ratio of less than 35%."
On the same note, it goes without saying (though bears mentioning) that switching jobs within a year of applying a mortgage can be a big red flag as well, even if your cash flow remains steady during that time. "Lenders like to see a history of consistent income," Capalad says. "They will ask for two years of tax returns, and you will get asked additional questions if you recently switched jobs."
5. Become a document expert
When it comes to applying for a mortgage, there will be a seemingly endless amount of paperwork to fill out, but you can save some time if you come prepared. "Necessary documentation for a loan would include 30 days worth of pay stubs, two years worth of W-2s, two years of personal taxes, two months of bank statements with all pages — even if the last page is a disclosure form — two forms of ID, like a license and passport, and all pages of your most recent quarterly retirement statement, if applicable," says Jeremy David Schachter, branch manager with Pinnacle Capital Mortgage Corporation. And, he says, "If you are self-employed, add two years' worth of corporate taxes, if applicable."
6. Know your credit score
Your credit score can sometimes make or break whether you end up getting the house of your dreams. "I recommend signing up for a service that's $7 to $10 per month that allows you to monitor your credit score and find out if anything gets on your report without your knowledge," says Lindsey Kinnsch Michael, CDAT, managing partner, discount purchasing agent with United California Realty. "Many preferred credit card companies will include this for free or for a tiny fee, and it is vital to take care of anything before it turns too major. If you are 15 days late paying your car payment, you don't have to worry about anything too much besides paying a late fee, but once it hits that 30 day mark, your score could drop as much as 100 points." Stay on top of and manage your credit in the months (and year) leading up to applying for a home loan to avoid any surprises.
7. Refrain from making large or difficult-to-explain purchases
"I had a client whose mom was co-signing on the mortgage," Capalad says. "Instead of writing a check, she just transferred the money into my client's account. The bank's underwriters flagged it and had my client and her mom write a letter explaining where the money came from." This small "mistake" delayed the loan processing by an entire week just because of all the back and forth. Capalad recommends making any big transactions many months in advance of starting the loan process. "Banks ask for 2-3 months' worth of statements, depending on how strict they are," she said. "Or, if that's unavoidable, ask the bank what to do before you make any big moves in your bank account."
8. Avoid applying for new credit
Schachter recommends opting out of any new credit card offers in the months leading up to applying for a mortgage. "Many times borrowers get tempted to open up that 0% financed home improvement card that can dramatically drop your credit scores," he said. That's a big no-no: New credit cards or loans can negatively affect your credit score for up to 12 months after applying for them.
It may seem like a lot, but getting all of your financial ducks in a row prior to looking into a mortgage can save you a lot of time and hassle. As a final takeaway, Michael recommends making an effort to get pre-approved before starting to house shop. "So many times people will contact me after they got a new home in escrow and they need me to do their loan in just a few weeks, but they haven't even begun a financial package yet," she said. "Just compiling the information can take you weeks, so have a goal to get a pre-approval letter in your hand before you even ask a realtor to start looking for