The frenzied housing market caused by the pandemic looks like it is slowing down and may finally be more favorable for buyers. Though 30-year mortgage rates are higher than a year ago as interest rates climb, they're still historically low, according to historical data from the Federal Reserve.If you're like most Americansa home, you'll probably . But don't apply before doing your homework. Lenders look thoroughly not only at your sources of income but also your financial behavior before they approve a mortgage.
If you're thinking of buying a home soon, lenders are standing by to help you get the best interest rate possible.
To prepare for the process, you'll want to look at your financial situation the way a lender might - including red flags.
While not an exhaustive list, here are five things that may give a lender pause:
Poor credit rating and history
Lenders use your credit score and history to judge your ability to pay back a loan, so it's essential to do everything you can to ensure the highest credit rating and most favorable history possible.
In the case of mortgages, the better your credit score, the lower the interest rate a bank may offer. Even a small adjustment down in a mortgage interest rate can save tens of thousands of dollars over the life of a loan. Most lenders require a score ofto qualify for a mortgage.
If you have poor or incomplete credit, repair experts can help you improve your credit score. This will help ensure that you don't pay more than you should.
For instance, if you are approved for a $200,000 mortgage, an excellent credit rating may help you qualify for a 30-year loan at 5.25%, while a less pristine record may qualify you for a 6.75% loan.
This may not seem like a big difference to start but over the life of a 30-year mortgage, the interest rate difference will cost you thousands of dollars extra. Use a mortgage calculator to determine the exact figure.
You'll also want to get your free credit report, look for any errors and dispute incorrect information.
Unusual activity in your bank account
Hold off on any unusually large deposits or withdrawals until your mortgage loan is approved.
When a lender sees a big deposit, they may become concerned you don't have the resources long term to pay your mortgage regularly.
Conversely, a large withdrawal can prompt a lender to wonder if you are a less-than-careful spender.
Even buying large items for your potential new home - such as a furniture set, washer/dryer combo or new big-screen television - can set off alarms. It's a good idea to hold off on those items until your mortgage is finalized and signed.
If you have questions about what to expect from the loan application process, you can also contact lenders to get an idea of what they will and won't be looking for. Lenders can help you with the mortgage process today.
Uneven employment history
You'll want to be able to show steady employment to prove to the lender that you have reliable sources of income. For instance, lenders look for "reasonableness" when examining income. If your income doesn't align with your employment, age, education and or apparent lifestyle you could raise eyebrows.It's best not to quit your job, for example, during the time you plan to apply for a mortgage.
Your debt-to-income ratio is too high
Your debt-to-income ratio is calculated as your monthly debt payment totals divided by your gross monthly income (your earnings before taxes and other deductions). Lenders use this ratio to determine if you can afford your monthly mortgage payment.
Ideally, your total debt-to-income ratio should be less than 45%, according to Freddie Mac. Being aware of this, it's a good idea to take a hard look at how much mortgage paymentalong with other expenses.
Missing or poor documentation
Be prepared for your lender to check every piece of information you provide. When you visit a lender or apply online, you'll want to have on hand:
Social security numbers for you and your spouse, if applicableChecking and savings account statements for the past six monthsDocumentation for assets like stocks, bonds andSeveral paycheck stubs that detail your earningsA list of credit card accounts and statements showing what you oweIncome tax statements for the past two yearsName and contact info (including address) for someone who can verify your employment
One way to determine the size of a loan a lender may approve is to apply for a pre-approval or, its less-intense cousin, a prequalification letter. This process gives you a good idea of what a bank is willing to lend.
You should also create a budget. This helps determine how much house you'll be able to afford on top of your daily living expenses and long-term goals. This can help you settle on how much you really should borrow versus what a bank may be willing to lend. You can also include expenses you'll have once you own the home like homeowner association fees, local permit fees and utilities when you calculate a budget.
Remember, you want to be as prepared as possible when heading into a mortgage closing. Check with a financial advisor to make sure you're on the right path.