When you apply for a new mortgage, you want the loan officer to reach for the "APPROVED" rubber stamp with a smile on her face. That's because the broader the grin, the better the mortgage rate you're likely to be offered. Loan officers all look for similar characteristics in applications, and your chances of meeting their expectations should be immeasurably improved if you follow these four golden rules.
1. Start Early
Some of the following rules involve meeting objectives that can, depending on your starting point, take months or years to achieve. So you need to start now working toward getting the best mortgage deal you can.
When setting your personal objectives, you want to challenge yourself without being unrealistic. Few applicants are perfect candidates, and if you wait until you're one of them, you risk in some areas seeing home prices rise faster than you can keep up. So you may prefer to aim to become someone who's more attractive to loan officers rather than to be perfect.
2. Improve Your Creditworthiness
This may well be the single most important criterion used by loan officers. The lower your credit score, the higher the mortgage rate you'll likely be offered. And a very poor score could see your application declined altogether.
First, get a free copy of your credit report (you're entitled to one annually) from annualcreditreport.com. Then check and monitor your score. The fastest ways to improve your score include paying all your bills on time, paying down credit/store card balances and not unnecessarily opening and closing accounts. But it's a good idea to learn as much as you can about scores from reputable online sources so you can actively manage yours.
3. Pay Down Debt
When you apply for a mortgage (or to refinance), loan officers will look closely at your existing debt burden. If you're paying more than 43 percent of your gross monthly income keeping current with debt (including payments on your new mortgage), you'll generally, but not always, see your application declined.
If your loan officer mentions your "debt-to-income ratio," this is what he's talking about. And the further you can push yours below that 43 percent mark, the wider his smile's going to be.
4. Save, Save, Save
Buying a home's not cheap. Unless you're entitled to a loan backed by the Department of Veterans Affairs or the Department of Agriculture, you're almost bound to need a down payment (a minimum 3.5 percent of the purchase price, and 20 percent for some types of loans), and the funds to cover closing costs, which are commonly 2-6 percent of that price, largely depending on the local taxes where you're buying. Your lender must give you a Loan Estimate soon after you apply, which will give you a good idea of what to expect.
It's hard enough to scrape together those sorts of sums, but you can earn brownie points with your loan officer (and maybe a slightly lower rate) by having a worthwhile emergency fund too.
Don't panic! Remember that point about being realistic about your goals. Yes, you'll likely get a fantastic rate on your new mortgage if you have great credit, low or zero debt, a high down payment and healthy savings. But chances are you want to be a better applicant who qualifies for a better rate, rather than a perfect one who gets the best possible deal. So do what you can, and you should benefit from every improvement.