If you plan to buy a house in the future, there are several things you need to know now about how banks make decisions on approving mortgage applications. Make sure you’re demonstrating financial stability in these three key areas and you’ll greatly improve your ability to secure the best loan.
1. Credit History
Sure, you know about the importance of a good credit score, but do you know that mortgage companies also look at other details in your credit history? Avoid triggering these red flags:
Don’t apply for multiple credit cards or credit accounts in a short period of time, and don’t apply for any prior to applying for your mortgage or prior to closing on your loan.
Don’t take cash advances or pay only the minimum monthly amount on existing credit accounts. Both of these actions indicate that you are experiencing hard times or may be in financial crisis. Keeping a reasonable credit reserve in each account will bode well and paying off the balance on credit cards each month will help boost your credit score.
Don’t co-sign on loans for others. Co-signing means that someone else’s loan appears in your debt-load column—and that late payments or defaults by the other party may damage your credit.
NOTE: Prior to closing, lenders may pull your credit report again to ensure your debt-to-income ratio hasn’t changed, so keep things stable throughout the loan application process.
Your ability to make mortgage payments is another important consideration. Try not to begin a new job a few months before applying for a mortgage. Many loan officers want to see two or more years of steady job history when considering your “loan worthiness.”
So, if you want a new job and you want a new house, it’s usually preferable to get the house first and then change jobs. One exception to this would be taking a promotion, either within the same company or at a different company in your same field.
Self-employment and commission-based sales work looks more risky to lenders. That doesn’t mean you can’t get a loan if you are self-employed, or get paid on commission, but you will need to demonstrate a history of regular income from these types of employment.
If you are self-employed and plan to apply for a mortgage in a year or more, now is the time to start cutting yourself regular “paychecks,” so you’ll have a collection of pay stubs to share with a lender, outlining the details of your earnings and showing a history of regular income and stability.
3. Cash, Collateral and Spending
If you want to boost your ability to obtain a mortgage loan, owning financial assets, such as stocks and bonds, will improve your chances.
Likewise, if you have a substantial amount of liquid assets (such as cash in a checking or savings account, or short term CDs), you will look more attractive to a mortgage company.
Investment and retirement accounts, even though they are less readily accessible, indicate a history of saving and a stronger financial position.
All of these accounts should show a history of growth over time, as opposed to being the result of a large amount deposited once or twice right before applying for a loan. Those types of deposits look suspicious and won’t improve your loan-worthiness in the eyes of a potential lender.
Banks may also check your spending habits by reviewing your checking and savings accounts and comparing your deposits and withdrawals, so keep these steady for several months prior to your application as well.
Any actions that indicate you may have problems handling money will lower your chances of securing a mortgage. So, if you plan to own a home, get an early start on establishing your financial stability—not just on paper, but also in reality!