Underwriters are the bank employees who calculate the risk of loaning money to each potential borrower. Some risk factors that can affect your mortgage interest rate or your acceptance rate are well known: Your credit score, debt ratio, and debt-to-income ratio. Other risk factors or concerns aren’t as well known: Sudden changes in debt ratio, changes in name or address, closing accounts, and accepting gifts to use as down payments. Learn about what lenders are looking for, what they avoid, and consult your lender before making big financial moves.
Here are the top 10 tips to prepare your finances for a home loan!
- Stay current. Make on-time payments for your current credit cards, rent/mortgage, loans, and other accounts. This will help you retain or improve a good credit score, which can lower the interest rates you are offered for a home loan.
- Stay steady. Spend normally. Sudden increases in purchases, new debt, or a drastic change in your spending habits can be a red flag for financial instability.
- Keep debt low. Don’t apply for a car loan, new credit cards, or add new debt. Keep paying steadily on your old debt. Ideally, your balances will be 30% or less of your credit limits. Also, you want to show a predictable, conservative debt-to-income ratio to show you’re a responsible borrower.
- Consult your lender. If you suddenly need to replace a vehicle, have an unexpected expense, talk to your lender about the best way to meet your increased financial needs without impacting your mortgage application. They may have suggestions, guidelines, or solutions for you. Have a payment issue? Often your lender can guide you through creating a letter of explanation for underwriters about a missed payment or a rough financial patch.
- Keep your accounts. Have a credit card you opened in college? Don’t close it! While it does lower your potential debt, closing that older account can make your credit history shorter and it changes your balance sheet. Open credit that isn’t being used or is lightly used can actually raise your credit score, while closing unused accounts can adversely affect your credit score by making it seem as though you’re using a bigger percentage of your credit limits.
- Student loans. Check with your lender about what consolidating accounts would do to your credit score and balance sheet. Often, lenders are looking for stability more than perfection, so don’t make big financial moves (even positive ones) without checking with your lender.
- Monitor your score. Take advantage of your bank or credit card’s credit score monitoring program and keep an eye on your score. Your lender can tell you what their minimum acceptable score is and using the monitoring program will help you spot actions, choices, and errors that can affect your score.
- Check your history. Did you pay off a student loan? Ensure your lender reported that payoff correctly. Does your credit score reflect an account you never had? Write the credit bureaus and petition to have the account removed from your history. Make sure the score and history you’re going to be judged on is correct!
- Life changes. Be cautious about changes in address, name, or occupation. These can cause lenders confusion or concern. It may be best to wait until after you have purchased your home to make big changes like these.
- Gifts. If parents, grandparents, or a recent inheritance will be affecting your down payment, talk to your lender. There may be additional paperwork or concerns for your mortgage application. Your lender is your best advocate through this process.
If you have any other questions or need to connect with a reputable lender, don’t hesitate to ask us – we’re happy to help!