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FOR THE RECORD: This story should have directed readers to a government website for free credit reports, AnnualCreditReport.com. It is the only authorized source for the free annual credit report by law, according to the Federal Trade Commission. Numerous other sites often have fees and confusing opt-in and opt-out instructions associated with them.
Qualifying for a mortgage hasn’t been a piece of cake for a while now, but a little planning and advance preparation can make the process run smoothly and improve your chances of being approved.
Gone are the days of getting a mortgage quickly with little paperwork. Lenders have tightened their practices and ramped up requirements to comply with new rules in the wake of the mortgage lending crisis.
Tom Mahoney, an owner of loan origination company New Mexico Mortgage Advisors, uses the phrase “back in the day,” when he talks about the years before the housing bubble and waves of foreclosures.
“There are definitely a ton of differences,” added Denise Dobier, branch manager of Sierra Pacific Mortgage Bank in Albuquerque. “It’s a very, very different world. … The pendulum has gone very far to the other side.”
The biggest change is that lenders now require a lot more documentation.
“There is much more, just mountains of documentation required with a loan,” Dobier said. “A lot more details have to be provided by a borrower.”
There also are many more disclosure forms to sign. “It’s almost overload,” Mahoney said.
But don’t lose hope. Here are some tips from Mahoney, Dobier and the online Home Loan Learning Center from the Mortgage Bankers Association to help you through the qualification process:
Credit score: Before you apply for a loan, check your credit history through www.annualcreditreport.com. Make sure all the accounts listed are yours and that all the information is accurate.
“Credit scores are just absolutely critical,” Dobier said.
Lenders typically consider a score of 680 or higher to be good. The higher the score, the lower the interest rate. Lenders also check credit history for late payments, collections, bankruptcy and excessive monthly debts. Be prepared with an explanation if any of those apply to you.
Dobier recommends using, but not maxing out, your credit cards; also, refrain from closing cards because that closes out the credit history.
Credit scores also are important for mortgage insurance and for a lower down payment.
“Your credit scores needs to be a heck of a lot better today to get mortgage insurance,” Mahoney said.
Documentation: Gather all your paperwork before meeting with a lender.
You typically will be asked for two years of tax returns, 30 days of pay stubs, two months of bank statements, as well as statements showing dividends, interest or other income. Start a folder and keep it up to date. And make sure you include all pages of documents. For example, if a bank statement has five pages, you had better provide all five – even if the last one is blank – or the underwriter will ask for it later, Dobier said. Also, make sure your name is on printouts of e-statements.
Job history: Lenders want to see stable employment and income.
It’s best not to have had a major job change in the last year or two, particularly from one line of work to another. Lenders also will want to know how reliable income from bonuses, commissions and overtime is.
Debt-to-income ratio: This should be 45 percent or less in most cases, Mahoney said, adding that the requirement used to be 50 percent. For many programs, 36 percent is a standard ratio, according to the Home Loan Learning Center.
“That is definitely a change,” Mahoney said. “They have tightened that up tremendously.”
Savings: You should have a reserve of six months of expenses in the bank after you make your down payment and pay the loan closing costs. Lenders will ask, “How much money do they still have left over if something should happen?” Mahoney said.
New money: Lenders want a record of any new money that shows up in your accounts to be sure you haven’t received an informal loan that will saddle you with additional payments.
If you sell a car or other large asset, hang on to all the documentation such as the bill of sale and copy of the check you received.
“Keep your assets where they are,” Dobier added. “Do not move money around.” If you do, expect to be asked for a very detailed paper trail, including such things as bank statements before and after the transfer.
Be responsive: Although your lender works with you to make sure you qualify for a loan, the final decision is up to the lender’s underwriter, who measures the total risk being taken by an investor backing the loan. Expect underwriters to ask questions or want additional paperwork quickly; they are busy because interest rates are so low.
“It’s important that the borrower kind of jump into it and get it taken care of as quickly as they can,” Dobier said.
Choosing a lender: New licensing requirements, including background checks on brokers, have helped weed out bad companies, Mahoney said, but it’s still important to do some research or get referrals when deciding with whom you will work. Getting a mortgage can be a confusing process and it’s nice to have a local contact, for example, he said.
Research loan types: The main options are conventional and adjustable-rate loans, FHA loans and VA loans. Ask your lender about the pros and cons of each. Down-payment requirements, for example, can vary from 0 to 20 percent, depending on the program you choose.
Special situations: If you think you can afford a loan but don’t fit the classic income picture, consider a portfolio lender that keeps its own loans. They can be more flexible and consider your whole financial picture, but they might charge a higher rate.
