With this year's home buying season off to a strong start, due in large part to tight inventories and low interest rates, many prospective homebuyers may find securing financing an obstacle. In fact, the Fed reported a drop in purchase mortgages — loans for buying a home rather than refinancing an existing loan — has been most pronounced among borrowers with low credit scores. Originations have dropped by 90% for borrowers with credit scores between 620 and 680.
Regardless of where you fall on the credit score spectrum, here are some tips on how to secure financing to help make the mortgage process easier.
Get an Appraisal Earlier in the Process
To protect yourself from appraisal issues, it is important to order the appraisal as soon after offer acceptance as possible. Not only will it allow you time to get the appraisal to lender for review but, it can also help you re-negotiate the purchase price if value comes in low.
Line Up Your Down Payment Early
Have a conversation with your loan officer about how you plan on putting together the funds required for down payment and closing. In the months leading up to close, avoid moving money from account to account. If you do move money, keep a detailed "paper trail" of all withdrawals and subsequent deposits. If you are self-employed, it pays to think ahead and take your salary draw well in advance of loan application.
Keep the bank up to date on any changes in your financial situation, especially in regards to your employment. If you change jobs during the course of your application, alert the bank immediately. The bank will likely need to see a current pay stub and to contact the new company for verification. If you are no longer working where your application says you're working, your bank is going to put the brakes on your transaction.
Get Your Monthly Debt In Check
If possible, pay off debts with smaller balances (e.g., under $1,500), or — even better — loans with bigger monthly payments (keep in mind that car loans with less than 10 months remaining won't be counted), so they don't get calculated into monthly debt service. An important calculation in mortgage underwriting, debt-to-income ratio (DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. Lenders generally like to see all monthly payments — including the new mortgage payment, property taxes and insurance — reach no more than 38% of gross monthly income.
Think Carefully About New Credit
Refrain from opening or even applying for new credit. New credit accounts for as much as 10% of your credit score. Newly opened trade lines and credit inquiries can have a negative impact on your credit score. Every point in your credit score matters and even a small drop in your credit score could cause you to receive a higher interest rate for your loan or, worse yet, cause your loan to be denied.
Go Easy on the Credit Cards
Credit utilization is the percentage of your credit cards' limits that are currently being used. High credit utilization can have a significant impact on your credit score even if you pay your credit cards in full each month. Avoid large purchases that could increase your credit utilization in the 30 days that lead up to your mortgage application. A general rule of thumb is to stay under 30% utilization, but the lower the better.