It has become more difficult to obtain a mortgage to purchase a home. Costs continue to increase for mortgage lenders. Lower interest rates have reduced the profitability of lending money. And stricter banking regulations created in response to the bursting of the 2008 housing bubble have caused banks to be leery of lending to anyone without a higher FICO score and stellar credit history. Despite these challenges, it is still possible to obtain a mortgage, but it takes some work. Here’s how borrowers can improve their chances of obtaining a mortgage.
Cleaning Up Credit Score and History
To qualify for a conventional mortgage, lenders require at least a 620 credit score. Better interest rates are given to borrowers that have credit scores of 740 or higher. It is recommended to pay down debts to improve the borrower’s debt-to-credit ratio. Taking steps to improve their credit score before applying for a mortgage helps borrowers appear to be a lesser risk to lenders.
Making Payments on Time
Late payments that appear on the borrower’s credit history send a red flag to lenders. Potential borrowers should be vigilant in making on-time payments. This shows lenders the borrower is financially responsible.
Putting Down a Larger Down Payment
Paying a larger down payment tells lenders that the borrower is less likely to walk away from his or her mortgage. Having a larger down payment shows that the borrower is responsible for handling his or her finances.
Requesting a Smaller Loan Amount
The higher the loan, the greater the risk. A lender is more apt to approve a smaller loan amount than a larger one. This helps avoid problems with paying the mortgage if an unexpected expense comes up.
Avoiding Big Purchases Until After Closing
Instead of rushing around to purchase new appliances for a home, it is better to wait until after the house closes. Big purchases that are financed like a buying a new car, appliances or furniture increases the borrower’s debt-to-credit ratio and affects his or her credit score.
Having Paperwork in Order
The lender will require that the borrower provide proof of his or her income for the past two years. The borrower will need his or her:
- W-2 and 1040 forms for the previous two years.
- Proof of rent or mortgage payments made for the past year.
- Bank statements.
- A list of all debts owed.