Securing a mortgage is one of the largest financial decisions you will make in life. In order to qualify for the least expensive product, you have to know how to improve your financial profile. Lenders look at more than just your credit score – they look at the full financial picture you provide in order to determine your risk level. In order to minimize how risky you look, consider the following tips.
Maximize Your Credit Score
The first step is to find out what your credit score is right now. You have the right to each of the 3 credit bureaus’ reports once per year at no cost. The best way to use this service is to request one report from each bureau every four months. This way you know year-round what your credit report looks like and how likely it is for you to secure new financing.
Once you know how your credit history looks, you can start to fix things up if necessary. The first thing to look at is whether you have any late payments. If you have not brought these payments current, now is the time. Get every payment up-to-date and then continue to make those payments on or before their due date.
After your payments are brought current it is time to determine how much credit you have outstanding compared to your available balance. If any of your accounts have more than 30% of the balance outstanding, start paying those balances down. The lower your balances, the higher your credit score, so this is an important area of focus.
The final step to maximize your credit score is to avoid applying for any new loans or credit accounts before you apply for a mortgage. The older accounts on your credit report help your credit score, but newer accounts bring it down. Hold off on applying for any new credit cards, student loans or car loans until your mortgage closes in order to avoid a hit to your credit score.
Save Money to Improve your Financial Profile
The more money you have saved up, the better your chances of mortgage approval. Some loan programs require you to have a certain number of months of the mortgage payment saved up in a liquid account. Other programs do not require assets, but use them as a compensating factor when determining if you are a good candidate or not. For example, if you have borderline credit or your debt ratio is right at the allowed amount, having assets set aside can help sway the lender to approve your mortgage application rather than deny it.
Secure Job and Income Stability
The longer you stay at your current job, the less risky you look to a lender. Typically, lenders want to see a solid 2-year history at your current job in order to consider your income. Of course, there are exceptions to this rule, but this is the norm. The longer you are at your job, the more stability you show. The same is true for your income. Even if you changed jobs within the last two years, but your income increased as a result, this could work to your benefit. Lenders want to see stability or an increase – they do not want to see a decrease or a gap in employment. If you start thinking about this a few years before you apply for a mortgage, you can better your chances of approval by staying at the same job.
Decrease Your Tax Write-Offs
If you work for yourself or you receive commissions that total more than 25% of your gross income, you will have to provide the lender with tax returns to prove your income. This could hurt you in the long run if you write off a large amount of expenses in conjunction with your job or business. The year or two before you apply for a mortgage you should avoid too many tax write-offs. While this can increase your tax liability, it works to your benefit in the long run. If the income you report is excessively low on your tax returns, it could hurt your loan eligibility since this is the number lenders need to use to qualify you for the loan. Once you close on your mortgage, you are free to take those write-offs once again.
No matter how much you improve your financial profile for mortgage eligibility, make sure to shop around. Every lender has different requirements, some of which vary greatly from one another. In addition, every lender has different costs and interest rates. You will not know which lender offers the best rates until you apply with them. Your credit score does not get hurt with multiple mortgage applications as long as you do it within a short amount of time. This way you can compare each program and see which one fits your needs the most.
Improving your financial profile for mortgage eligibility is a work in progress. It will not happen overnight – you have to start thinking about it well before you want to apply for a mortgage. Generally, you should start preparing 2 years before you think you want to secure a mortgage. This gives your credit score, assets, employment and income plenty of time to get settled enough for you to look attractive to mortgage lenders.