Section Subtopics Before You Apply 6 Months 3 Months 1 Week Do's Don'ts 10 Questions For Your Lender

Before You Apply  

  Before you begin the process, there are several steps you need

  to consider, and a timeline you may find helpful to follow.  By

  doing so up to a year in advance, you can avoid the nasty

  surprises that result from applying without knowing your

  standing in relation to credit, assets, employment, and

  lender/product requirements.  The steps below will guide you

  through a timeline up to a year prior to your application.

  1 Year

  Review Your Credit:

  It's important to understand if there are problems or errors in your

  credit report that could affect your ability to qualify for a loan. To

  find out, you'll want to get a copy of your credit report, preferably

  a year prior to when you plan to apply for a mortgage.  Because

  these reports contain your credit history, it's important that you're

  aware of what they contain - and whether the information is

  accurate. You might have excellent credit, but odds are 1-in-4 that

  you'll find an error in your report. Look for mistakes, such as

  accounts that are not yours. When you find errors, contact the

  credit bureaus online, by phone or mail to dispute the error. They

  are required to respond to your dispute within 30 days.  See the

  Credit Section for further information, and bureau contact

  information.   A year may seem like more than enough time for this

  task, but disputes may take up to a year to resolve, especially if the

  bureaus contest your claims.  Give yourself time to go a few rounds

  with these companies. It helps if you resolve to be patient from the

  onset of your efforts.

  Figure Out What You Can Afford

  Determine how much you can afford - and what your monthly

  payments will be. The traditional lender expense-to-income ratio

  requirements are 28% for housing and 36% for total monthly

  expenses. This means that your total monthly housing payment -

  including mortgage principal and interest, insurance, real estate

  taxes and any condo association fees- should not exceed 28% of

  your before-tax monthly income. Then, when adding in all other

  consumer debt payments, the total figure typically shouldn't exceed

  36% of your monthly income. It is important to remember that for

  your lender's purposes, this should include only expenses that are

  reflected on your credit report.  This ratio need not include personal

  loans or utilities (unless reported to a credit bureau).  Remember to

  include expenses that are reflected on your paystubs, however.

  Employer loans against a 401k, for example, or wage garnishments

  such as alimony and child support. Ultimately, these ratios are less

  a rule than a guide.   Underwriters use a complex calculation that

  takes into consideration many things beside monthly expenses

  when approving or rejecting a loan.  To improve your chances of

  approval, conform as closely to the guidelines as possible. If you

  are approved for more than the guidelines, remember to keep the

  ratios in line with what you can comfortably pay.

  Reduce Your Debt

  The goal is not to pay off and close all of your credit card

  accounts.  Rather, it is to keep the balances low in relation to the

  limits, and continue to make regular payments.  Neither is it to

  close dormant accounts to leave only one or two open.  Lenders

  prefer to see a certain number of aged accounts.  If you close your

  oldest accounts, this may effectively reduce your open credit

  history timeline.  The goal is, however, to lower your monthly total

  expense ratio, so that you can qualify for a larger house if that is

  what you would like, or to add a cushion between your income and

  expenses.  It is important not to pay down or pay off balances with

  cash that is intended for a down payment. Even if you choose a

  low-down payment option, you're going to need cash available to

  pay the down payment and closing costs.  If you do intend to close

  a credit account, contact the card issuer and ask for instructions on

  closing the account. Instruct the card issuer in writing to enter into

  your credit report, "Closed at request of cardholder." By doing so,

  you eliminate any doubt a future lender may have as to why the

  account was closed.

  Save

  If you're like most people planning on buying a home, you need to

  reduce your spending to save up for a down payment and closing

  costs. At this point it is essential that you determine your goals, set

  a budget, and align your spending to meet those goals.

1 Year | 6 Months | 3 Months | 1 Week | Do's | Don't's | 10 Questions