As part of our continuing service to you, we’d like to offer some tips that may be helpful when you’re looking to purchase a new home or refinance your home loan.
Above all else, pay your bills and start saving.
Make loan and other debt payments on time, especially over the months leading up to the filing of your mortgage application. It sounds simple, but every 30-, 60- or 90-day delinquency on a loan or credit card will reduce the credit score the lender ends up considering as part of the loan file. That score, in turn, will determine the interest rate you get on your home loan.
If something has to be missed, miss the credit card payment first, followed by the payment on any installment loan you might have, and finally, the payment of an existing mortgage. Because credit-scoring systems look at the performance of similar loans first when deciding what type of score to assign, it’s best to follow this order. This will give the most weight to the performance of another mortgage, for example, then the performance of something like an auto loan, which features fixed payments and a fixed rate the way many mortgages do. Payment performance of so-called “revolving” loans, like credit cards, which feature variable payments that fluctuate with the outstanding balance, is typically evaluated last.
Consider paying off more debt and putting down a smaller amount at closing. This move will leave you with a larger mortgage, but it allows you to replace non tax-deductible, high-interest rate debt with lower-rate mortgage debt that features deductible interest.
Get the mortgage first if multiple financial obligations are going to pop up in the near future. Numerous credit inquiries, such as credit card applications, can hurt your credit score, especially if they’re filed in the months prior to the home loan review process.
Increase the size of the down payment you’re able to make by saving as much as possible, as often as possible. Evaluate money market or other accounts that offer reasonable rates of return, automatic payroll deductions, or other financial incentives to save.
While these are all great steps to follow, you also have to consider what you shouldn’t do as well. Resisting the temptation to splurge or slip-up in the credit arena is at the top of the list.
Don’t make any big purchases over the next couple of months. Besides the obvious fact that it makes less money available for the down payment, it might require you to get yet another loan. A significant debt such as a $15,000 auto loan will look bad to the mortgage lender’s credit scoring systems and will significantly reduce your purchase power. Plus, the human underwriter won’t want to see you adding a couple of hundred dollars per month to your monthly expenses.
Don’t try shooting for that six-bedroom house in the Hamptons if it’s going to be too much of a stretch in your current budget. Lenders consider what’s known in the industry as “payment shock” when approving loans. Someone who goes from a relatively small monthly housing payment to a large one either won’t qualify for a mortgage or will end up having to cover too much loan with too little money.
Don’t just get pre-qualified for a mortgage; get pre-approved. To get pre-qualified, you only need to submit credit and income/debt information voluntarily to a mortgage broker or lender. The resulting estimate of the maximum mortgage and home that’s affordable is exactly that — an estimate. Before you can get pre-approved, however, you must allow your lender to pull your credit report, check your debt-to-income ratio, and perform other underwriting steps. That puts you much closer to obtaining a loan and locking in a rate and term.
Don’t forget what kind of money personality you have when getting a mortgage. By taking out a 30-year fixed rate loan rather than a 15-year mortgage, and investing the money saved on monthly payments, you might earn a higher return on your money in the long run…but that approach won’t work if you enjoy dinner and a movie twice a week. You can force yourself into saving and accumulating equity faster by going with the shorter term and higher payment.