Wise financial decisions are critical during the period leading up to submitting a mortgage application. Do plenty of research, cleanup personal financial flaws, and make smart decisions about changes occurring in other areas of your life that will affect the judgment on your application. Follow the below steps to put yourself in the best position for getting approved for your mortgage application along with receiving the most optimal home interest rate.
Be Prudent with Your Credit
The basis of every mortgage application is your credit score. Months before you apply for a mortgage, start lowering credit card balances to less than 50% of each credit card’s limit. Be aware of actions you could be taking that are lowering your credit score without your knowledge—for example, having your credit score pulled more than the minimum amount. When you allow multiple lenders to all pull your credit score, your score could lower by up to four points—even if the loans does not end up being taken out in the end. Credit scores are the primary driver on the interest rate you will receive on your loan for the next 15–30 years, so it is important to be aware of all actions,—both large and small—that will affect your score.
Manage Cash Assets
Lenders look into the cash flow history in both your checking and savings account. If you are saving up for a home, save your money in the bank. Some homebuyers have chosen to save cash where they live, and when it is time to apply for a mortgage they deposit the sum into the bank—this does not look good to lenders. Lenders cannot count cash as an acceptable source of fund for purchasing a home. Bouncing checks is never a pleasant situation, but it can have a serious impact on your mortgage application if you bounce checks within a year of applying. Lenders look at non-sufficient funds history (“NSF”), and an NSF on your bank statement is a derogatory credit event. Lastly, avoid moving your funds around too much between your accounts. Many people transfer funds between savings and checking accounts on a daily basis, and make frequent deposits at ATMs—all of this causes lenders to think the applicant has cash flow problems.
Seek Employment Stability
Lenders want to see stability in borrowers’ work history and salary. If you are simultaneously on the brink of a job change and applying for a mortgage, make the change before applying, or wait until the mortgage has been approved and closed to switch jobs. Lenders need time to finalize the mortgage, and seeing a change before it is finalized could cause the whole deal to fall apart. When lenders see a job change, they often require an extension, and the seller may choose to sell the home to another offer if they do not want to wait for the extended mortgage approval. Additionally, a change in pay structure could cause problems in your mortgage approval, even if you are earning more money. An example is a borrower whose job paid 90% salary and 10% commission. With the 90% salary he qualified for the loan. But he then switched his pay structure to 90% commission and 10% salary—this caused issues for his mortgage application because lenders do not count commission right away when evaluating a borrower’s income.
Select the Right Lender & Ask Questions
When you are set to apply for your mortgage, be selective in the lender you choose. When evaluating lenders, do not allow multiple lenders to pull your credit report, due to reasons mentioned above. If you are one point shy of the next better level of credit, it could be due to a four point drop from having your credit report pulled too many times. Avoid paying 30 years of mortgage payments at a higher interest rate because you were one point shy of a better credit level! Ask your potential lenders the correct questions. Good lenders are licensed mortgage bankers and have gone through the mortgage process personally. A licensed mortgage banker is required to pass a difficult test, have a background check performed by the FBI, and have their credit own checked. All of these checkpoints are important for your lender to have passed because you will be giving him or her every piece of your confidential financial information along with your personal information. Borrowers should use a lender who has personally gone through the mortgage process—this is likely the largest financial transaction in your life—it is wise to work with a lender who personally understands the position you are in when applying for a mortgage. As you research lender options, ask them about their appraisers—do they have their own panel of appraisers, or do they subcontract appraising to a third party? Lenders who have their own panel of appraisers have more oversight on the quality and accuracy of each appraisal. Lenders with their own appraisers will have better quality and higher standards than lenders with third party appraisers.
Don’t Solely Focus on Interest RatesWhen shopping for mortgage lenders, be wary of any lenders that offer an interest rate outside of ¼ to ⅛ of other interest rate offers. If they are offering you an interest rate outside of that range, something is likely wrong. Instead of exclusively focusing on the interest rate, consider these factors:
- An accurate appraisal is directly associated with the interest rate you will receive.
- Lenders should be able to commit to closing your transaction in 30 days. If they need more than 30 days to process your application, you will need an interest-rate lock extension, which comes with a cost. And you may need a purchase agreement closing date extension, assuming the seller is willing to give you one.
- Seek out a mortgage banker who will offer balance between a low interest rate and low closing costs. Beware of lenders offering the lowest interest rate because they probably will bill you the highest rate of closing costs.
Applying for mortgages may be a hassle, but taking the recommended steps and precautions will be worth the extra effort. Contact Homesite Direct to work with a trusted and experienced lender and advisor on your mortgage application.