Most new homeowners are quite careful about their spending and credit in the months and years leading up to a home purchase. Homeowners budget and save, and avoid making unnecessary credit inquiries in order to qualify for a home loan. What many people don’t realize is that qualification doesn’t equal a successful closing. When you’re buying a new home, make sure you preserve your financial status all the way through closing to make sure you don’t compromise your loan.  

Qualifying for a Loan is Only the Beginning

Some homeowners erroneously believe that qualifying for a home loan means you’ll automatically get it, and you’re home free on the home purchase. In reality, qualifying is only the beginning. A lot of steps are still involved to make sure you get your home.

Once you’re approved for a home loan, the lender still has to do a lot of homework to verify your debts, your employment, your income and all of the details on your application. You’ll also need an appraisal to demonstrate that your home is worth the loan amount you’re requesting, and you may need an inspection to prove the home is sound. In other words, qualification is only the beginning – there’s still a long road until closing.

Avoid Changing Your Financial Status Before You Close

Homeowners who believe they’re “home free” during this period sometimes change their financial status before closing. This is a bad idea. Changes to your financial status, such as buying a new car, quitting your job or opening new credit cards and maxing them out can be a major red flag.

If your lender discovers these things during the closing process, you may find that you’re no longer eligible for the same terms, or may even be denied for a loan altogether. Don’t take care of your financial status only to wreck it during closing. Wait until your home loan is closed to make any changes to your finances, and when you do, make sure it won’t impact your ability to make the payments on your new home!

Mortgage applications ask for a lot of detailed information about your current employment, former employment, previous residences and income information. When you’re trying to get a home loan, you may be worried about how you answer a mortgage application, and want to present yourself in the most favorable light possible. Don’t fudge on your mortgage application, though; in addition to being a federal offense, it can result in your application being denied. 

Be honest about employment dates.

When you’re hunting for a job, you may not want to show gaps in your employment to potential employers. Some people feel the same way about mortgage applications; lenders look at employment information, so people want to present themselves in the best light possible.

Resist the urge to fudge employment dates and information.

Lenders can and will call to verify employment information. If you give incorrect information, lenders are going to begin carefully scrutinizing your loan application. Lenders don’t like inconsistencies, as they can expose them to big risks. If they spot one inconsistency, they’ll be looking for more, and may use it as an excuse to deny a marginal application.

Don’t fudge on current and prior income.

Stretching the numbers on your income is another big no-no. You may be worried that if you don’t show a high enough income, you won’t be approved for a particular home loan. That’s true. However, if you don’t earn a high enough income to qualify for the home loan, you won’t be doing yourself a favor if you get approved anyway.

Lenders set income guidelines because those are the guidelines within which most people can live comfortably. If you fall outside of those guidelines, you may feel you’re still able to pay for a home loan, but you might have to give up a lot to do it. Don’t fudge income information to get a bigger loan. Either come up with more money down, or select a home that falls within your lender-approved price range. Stretching yourself too thin from the beginning is a strong recipe for disaster.

When you’re applying for a home mortgage, you’ll need to provide lenders with a full, detailed list of your assets and liabilities. Assets include all of your financial resources, such as retirement accounts, existing real estate and savings accounts. Liabilities include every credit card, every outstanding loan and even medical bill payments. Are you prepared for this disclosure? 

Disclosing assets.

For the purpose of a mortgage application, assets are categorized in liquid and non-liquid groups. Liquid assets are assets which you could theoretically access on a short timeframe, such as checking, savings, and stocks and bonds that you could sell to come up with cash. Non-liquid assets are things you own, but which you can’t immediately turn into cash, such as existing real estate.

Disclosing liabilities.

Just like you have to provide a list of assets, you must disclose all of your liabilities to potential lenders. This includes every outstanding credit card balance, all outstanding loans and any other money that you owe for any reason. If you have tax liens or payment arrangements set up for child support, alimony or even employment-related expenses, you must disclose them on a loan application.

How to begin preparing for full disclosure.

Don’t fudge or leave off any debts, because lenders do pull your credit report and can ask you about liabilities that you fail to list. You’ll want to be prepared for a full disclosure, so make sure you start well ahead of time to make sure you have the information and documentation you need.

Save account statements, credit card bills or any documentation pertaining to assets or liabilities once you know you’ll be applying for a home loan. If you have the cash to pay down or pay off liabilities, do it before you apply for a loan, so lenders won’t consider the liabilities when they’re evaluating your application.

The financial industry tagline is “Shop around.” Every information source everywhere tells you to never take the first loan, savings account or financial instrument you see. You can’t make an informed decision until you’ve evaluated what’s available, and compared what you’re offered with what you could get. Does the same generalization hold true for mortgage applications?  

Brokers can save you the hassle of shopping around.

First and foremost, a good mortgage officer can save you the trouble of shopping around. A mortgage officer basically works as your liason with one or more lenders to determine what type of mortgage you’re eligible to receive. When you find the right mortgage officer, you know you’re getting the best deal out there, without having to do all the legwork yourself. Go with the wrong mortgage officer, and you’ll only hear what he wants you to hear, and you may not get the best deal.

You can check with lenders without applying for a mortgage.

Whether or not you’re using a mortgage officer, you can still shop around without applying for a mortgage. Many lenders publish potential interest rates as an incentive to get buyers to inquire about more. If you know the status of your credit score and your general credit-worthiness as a buyer, you can get a fair idea of what type of interest rate you’d be eligible for. For example, if you’ve got bad credit, you’re not getting the 4.25% interest rate that lenders are advertising.

However, if your credit is golden, you’ve got plenty of cash to put down, your income is high and your debts are low – you might just be the ideal borrower, and may be eligible to get rates close to the lenders’ low published rates. Use these rates as an index to evaluate where the market stands and what you’re likely to qualify for, and if the professional you finally utilize gives you something drastically different, you’ll know to ask why.

As the economy and the housing market started to tumble, combined with a significant increase in the unemployment rate, we sat back and watched as the mortgage lenders were the next domino to fall. With more and more mortgage lenders closing up shop, the ones that were left standing in the rubble started to tighten lending requirements.

So what does the new mortgage lending horizon look like for borrowers? What should you expect?

Good credit scores need to be great

With one of the major factors of mortgage approval, terms and conditions being the credit scores of the borrowers, how high your credit score is has become even more important. The sad news is that what was considered a great credit score before the lending crisis struck is now only considered mediocre—at best. This means that your FICO score has to be at or over 750 to be considered great.

No doc loans have gone bye-bye

Self-employed individuals or those who do not have documents that support the amount of income they receive may be out of luck. Lenders are now requiring fully documented loans—meaning you have to provide tax returns, paystubs, bank statements and more. Lenders are no longer lending on stated income.

Automation is out, humans are in

Mortgage lending was a very technically advanced industry. Numbers and information were entered into a computer program and a lending decision was made (at least for the most part). Human underwriting has made a comeback in more recent times, so the loan officers and underwriters are digging more into your financial situation and asking more questions than what was happening in the two previous years. The information you provide and the answers you give to the questions have become more of a determining factor whether or not you’ll be approved or what the terms and conditions of the loan will be.

Tough times call for tough measures and the mortgage lending industry is no exception to this.

Lift Your Income to Qualify for Your Dream Loan

Income is a big factor in determining whether or not to issue you a loan. Loan calculations take into consideration your total debt, housing debt and the ratio of these numbers to your gross income. If your numbers look too high, you can always lift your income in order to qualify for the mortgage for your dream home. Qualifying income varies

Many people don’t have a single, steady source of income. In many households, people have multiple sources of income, and these sources may fluctuate. For example, waiters may have trouble proving a steady income, because tips vary so much. People who hold down a part-time job may find that their income fluctuates depending on how many hours they’ve worked. Even regular, full-time employees may have fluctuating income due to overtime, bonuses or commissions.

Showing a history goes a long way toward establishing that income is steady

One of the first things that lenders look at when evaluating your income is your income history especially if you are self-employed or on a commission pay structure.  Lenders will look at your last two years of tax returns if you fall into either of the last two categories.  They’ll normally average out the last two years unless your most recent year is much worse than the prior year.  If that’s the case, they will most likely use the most recent year only.

If you’re salaried, they like to see a history of employment for a year.  So if you’ve been unemployed or chosen not to work for an extended period of time, plan on being at your current job for a year.  The exception would be if you’ve just graduated from school.  Any bonuses, overtime or commission you receive at your job would be counted as long as you have a track record going back 1-2 years minimum.

Explain your income, in writing, if in doubt

If you’ve got special circumstances, explain it to your lender, in writing. If you can provide evidence to back a less conservative income estimate, your lender may be willing to consider it if he’s got it on paper. Make sure you explain thoroughly, and enlist your accountant if you have special income circumstances.

Reduce Debt to Qualify for a Bigger Loan

The total debt ratio is one of the key factors that a lender considers when determining your loan eligibility. If your total debt ratio is high, you can always reduce your debt in order to make your numbers look better, and get the approval you want for your dream loan.

Calculate your existing debt

Before you can reduce your debt, you must calculate your existing debt. Your existing debt includes any regular monthly obligations, including auto loans, student loans, medical bills or personal loans. It also includes credit debt, including credit cards and store accounts.

If your debt to income ratio is high, one way in which you might reduce your debt is talk to your lender about deleting payments that are scheduled to end within ten months. For example, if your car loan is going to be paid off in four months, your lender would remove it from the equation.   If you have any installment debt that has close to 10 months remaining and you have some available cash, you could pay it down to where 10 months only remain.

Avoid new debt and pay off existing debt

Plan ahead when you’re shopping for a home loan. Avoid acquiring new debt when you know you intend to buy a home. Even if you think you can afford a new car or another credit card, avoid acquiring these debts to keep your debt ratio low.

Likewise, pay off as much debt as you can prior to applying for a home loan. If you’ve got small balances on some accounts, pay them off so they don’t count toward your minimum payments. Pay down large balances so they look better to a lender; most lenders prefer that you carry debt of less than 30% of your total available credit.

This will also help your credit score but be sure to pay down or off any revolving debt at least 30-45 days prior to applying to allow your creditors to update the credit reports and reflect the new scores.

If you are ready to submit your mortgage application, you are likely wondering which personal financial factors are going to be taken into consideration. In addition to a variety of financial documentation required to substantiate portions of your mortgage application, lenders will review your personal credit report carefully.

There are a variety of factors that a potential lender will review on your personal credit report, including:

• Payment History- Your ability to pay previous and current debts on time will be reviewed. In the event that you have missed a payment or have collections, bankruptcies, defaults, liens, repossessions, foreclosures or judgements, your overall credit score will be reduced.

• Current Obligations- The current level of debt you owe in comparison to your total household income will be reviewed. Most financial professionals will recommend maintaining a debt to income ratio below 50%.

• Credit Length- Potential lenders will be interested in how long you have had open credit, as the longer you have maintained personal on time payments reduces your overall credit risk in the eyes of most lenders.

• Types of Credit- Potential lenders will be interested in the type of credit that you have. Do you have auto credit, credit card debt, personal loans or other mortgages? Most lenders prefer to see debts secured by assets.

Your personal credit score is considered to be a reflection of your potential risk to a new mortgage lender. In addition to your credit score, potential lenders will be interested in the overall stability of your financial situation. Do you have sufficient household income? Do you have substantial investment and cash assets?

While many lenders will still offer funds to individuals who are not placing a sizable down payment, the ability to place cash down is considered a strength. Remember, lenders want to know that they are making a sound financial investment by offering you funds to purchase a property.