Preparing To Fill Out A Mortgage Application
Applying for a mortgage can be a process unlike anything you have ever undertaken in your life. If you are a young couple looking to purchase your first home, then you will want to set several days aside to accumulate all of the information a lender will need when you submit your application. Income history, credit information and references are just some of the bits of information the average lender will want in order to even consider your mortgage application.
But that is not all. Before you even submit your application, there are things you will need to do in regards to your credit and down payment that you may have never done before. Have you ever scoured your credit report from each of the three major credit reporting agencies just to see if your name is correct on the application? That is just one of the things you will need to do before submitting your application. It is a process that brings couples closer together as they unite to battle the process that is preparing a mortgage application.
Your Credit Report
Before you even think about putting pen to paper on a mortgage application, you need to make sure that your credit reports are in order. When lenders consider your mortgage application, one of the elements they take into consideration is the credit score of you and your co-borrower. Your credit score is the culmination of your credit history. If there is an incorrect entry on your credit history, then it will affect your credit score.
The first thing you need to do is to obtain free copies of your credit report. The federal government has passed a law stating that every American consumer is entitled to one complete and free credit report once every 12 months. The major credit reporting agencies are Experian, Equifax and Trans Union. They all have very simple processes on their websites, or by phone, that will allow you to get a copy of your credit history.
Once you get your credit histories, lock yourself in a room for a few days and look over every detail. If you see a credit account that does not look familiar, then use the dispute process outlined on the credit report to challenge it. If one of your former addresses or employers is incorrect, then dispute it. Clean up all three of your credit reports and you will see your credit scores go up.
You can also help yourself by improving your credit score before you apply for a mortgage. Pay your credit bills on time and always pay at least your monthly minimum payments. Pay your credit balances down to 30 percent of the limit and keep them there. That will help to improve your credit score quickly. Higher credit scores mean lower interest rates and lower monthly payments.
The lender will want to see a comprehensive history of your personal finances. You are going to need at least three months worth of bank statements and paycheck stubs to submit to the lender. The most efficient way to present this information for the lender is to make copies and put the copies into a presentation binder that is easy to read. You will also need to present a signed waiver allowing the lender to access your bank accounts to check the history.
One of the things the lender is looking for is to see how well you manage money. If your down payment suddenly appeared in your checking account one day, then the lender will know it was a gift. But if you can show an account with a gradual accrual of the down payment through a savings plan, then that will show that you have fiscal responsibility.
You will also need to provide three years worth of tax returns, which can be tricky for some borrowers. You will either need to talk to your accountant or contact the IRS for copies of your last three returns if you don’t save them.
The lender is trying to develop an accurate profile of your ability to manage finances and determine if the information on your application is accurate. This is why it is a good idea to tell the truth on your mortgage application. It does not work in your favor if the lender researches your personal finances and finds out that you misrepresented your income on your application. It tends to kill the chances of you getting the mortgage.
Aside from your credit rating, your debt ratio is one of the most important numbers a lender will look at when considering a mortgage. Simply put, your debt ratio is how much of your income you use to pay bills and expenses. There are two kinds of debt ratios that your lender will use to determine whether or not you can afford a mortgage.
The first kind of debt ratio is referred to as a front-end ratio. Debt ratios are based on gross income, which can work in your favor if you have a higher tax bracket or you have a lot of pre-tax deductions such as a retirement account. The front-end ratio is how much of your income should be dedicated to paying your mortgage. The most common front-end ratio is 28 percent. For example, if you make $50,000 per year, then you cannot use more than $269.00 per week to pay your mortgage ($50,000 per year is $961.53 per week and 28% of that is $269.00).
The other debt ratio used in mortgage calculations is called the back-end ratio. This is the one that is more commonly used by lenders because it represents the percentage of your gross income that can be dedicated to all of your expenses, including your mortgage. Most lenders use the back-end ratio of 36%, although it could be different with your lender. Using the $50,000 per year example, the maximum amount that can be spent on all basic expenses in a back-end ratio of 36% is $346.00 per week. The bills included in this figure are mortgage, utility bills, installment loans and credit card payments. Bills such as health club memberships and groceries are not part of that number.
To help the lender get an understanding of your debt ratio, you can make a copy of each of your monthly bills and submit that to the lender. But, more often than not, the lender will feel more comfortable taking your debt ratio information from your credit reports. This is just another reason why it is a good idea to review and correct your credit reports before you apply.
Preparing to apply for a mortgage is a long process that requires the accumulation of a great deal of your personal and financial information. It is always a good idea to compile complete and accurate information to give to your lender to help the process along. Remember that your lender will find out the truth about your finances eventually. So it is best to be honest up front and establish a good relationship with your mortgage company.