Getting a mortgage is typically the largest single investment most of us will ever make. Increasing your mortgage borrowing power involves making yourself as attractive as possible to prospective lenders.
Here are 19 powerful tips to boost your chances of getting a mortgage at a fantastic rate within 12 months.
1. Improve your credit score by boosting your credit rating.
Your credit score is the single most important factor that will dictate whether or not you’ll get a mortgage and the rate you’ll get it at. If your credit score is poor or below average, you’ll be rejected. If your credit score is just average, you’ll probably be rejected or, at best, get a mortgage at a poor rate.
And the implications of a poor credit score can be pretty devastating. According to research gathered by Informa Research Services, someone with FICO scores in the 620 range would pay $65,000 more on a $200,000 mortgage than someone with FICOs over 760.
If your credit score is not as high as it could be and you’re planning to get a mortgage (or a re-mortgage), it’s worth starting to manage your credit history at least 6 months to a year in advance, depending on how much work you’ve got to do.
2. Establish a stable employment track record.
If you’re considering becoming self employed, you may want to wait to get approved for a mortgage before you do so. And that is because if you’re not on a company payroll, you’re going to jump through a lot more loops than if you were employed.
Lenders typically look for steady employment of two or more years for the same employer or in the same line of work. You’ll also want to make sure that you don’t have any job gaps over the previous two years.
3. Always pay your bills on time.
A history of late or missed payment of bills shows a lack of financial discipline, and is the quickest way to wreck your credit score and torpedo a mortgage application. Lenders need to be confident that you will repay your loan. The best way to ensure you never pay late or miss a payment is to setup an automatic payment system.
4. Report your rent payments to the credit bureaus.
As one of the most consistent bills that you pay each month, consistent rental payments can help you build your credit history and significantly boost your mortgage chances. In most cases, it costs far more to rent a home than to buy. Showing that you pay your rent on time every month, will go a long way towards convincing lenders that you’ve got the financial discipline to repay your mortgage.
Each of the three major reporting agencies (Experian, Equifax and TransUnion) will include positive rent payment history on your credit reports if they get them.
Although more property managers and rental companies are now reporting rental payments to the credit bureaus, it’s not standard practice. However, if your landlord doesn’t report rent payments, there are several online companies that will report rent payments on your behalf.
- PayYourRent allows you to pay your rent through an online tool and simultaneously build your credit history with Equifax, Experian, and TransUnion.
- RentalKharma allows you to add up to 24 months of past rent payments to your credit report and build your credit history. They report to all three credit bureaus.
- RentTrack acts as a bridge between yourself and your landlord. After you make payment to them, they’ll pay your rent and report consistent payments to all three major credit bureaus.
- Rent Reporters will contact your landlord to verify your payment history, and then report to TransUnion.
5. Shop around.
According to research from Freddie Mac, you could save $1,500 just by comparing quotes from 5 different lenders. This is because rates offered by lenders tend to change daily, and vary widely. When buying a home, your aim should be to borrow at the lowest possible interest rate, and you can only find the best rates by shopping around.
6. Get a diverse portfolio of credit accounts.
Part of your credit score is based on type and mixture of credit accounts. This means a healthy mix of revolving credit (credit cards), installmental credit (such as your car, utility or mobile phone payments), and student or personal loans. You’ll get the best results when you have at least one of each of these accounts.
The types of lending institutions you borrow from can also be a factor. Traditional banks (Citibank, Chase, Capital One) are generally viewed as more favourable than certain types of sub-prime loan companies that market to people with challenged credit.
7. Maximize your credit history.
A stellar credit history will save yourself a lot of money on hefty interest rates and help you qualify for the best mortgage rates on offer. Building a strong credit history demonstrates to lenders that you are creditworthy, with a history of repaying loans in full and on time.
8. Save for a sizeable down payment.
As far as mortgage lenders are concerned, the larger your deposit, the better the interest rate you’ll be offered. This is because you’ll be paying off a larger chunk of the property value, which means that you’ll be borrowing less and lowering the risk.
Aim to put down at least 20 percent of the property’s value to get some of the very best deals. Sometimes, the size of the down payment can actually make the difference between whether or not your loan is approved.
9. Check your credit report.
Before you apply for a mortgage, it would be wise to check your credit reports with all three reporting agencies to make sure that it is flawless and free of errors. Research shows that credit reports held at Equifax, Experian and TransUnion can contain enormous amounts of erroneous data.
Some of these errors can kill applications, so it’s important to make sure the information contained in the file is accurate, and that there are no unpleasant surprises. Go through them line by line before you apply for a mortgage. If you find any inaccuracies, take the necessary steps to get the errors removed, but be sure to do so at least 6 months before applying for a mortgage.
10. Pay off unsecured loans.
When considering your mortgage application, lenders will want to be reassured that you will be able to keep up with your mortgage repayments. They will run affordability calculations to determine whether you can afford to meet your payments. To do this, they will consider the total amount of credit available to you, your debt-to-income ratio and how they affect your overall financial health. The higher your credit card and other loans, the less the lender will believe that you have available for mortgage repayments.
11. Spend less.
When you apply for a mortgage, lenders will look in meticulous detail at your income and spending habits, and they will ask for a lot of detail about your outgoings. They will also compare your current income against recurring debts (student loans, credit cards, child support, alimony, etc.), and use it to analyze your debt-to-income (DTI) ratio. All of these items play a critical role in determining your ability to repay the loan. The lower the DTI, the better your chances of qualifying for a mortgage.
You need to carefully manage your funds, and cut down on your spending to prepare yourself for a mortgage. It can pay off to drastically change your spending habits and reduce your outgoings at least 6 months prior to making your mortgage application.
12. Carefully manage your available credit.
You need to carefully manage your credit by staying well below your available credit. Try to stay around 25-30% of the available credit you have on any revolving credit lines.
13. Don’t close unused credit accounts.
Lenders don’t like to see too large an amount of credit on your account because of the concern that you’re going to run up huge debts once you get a mortgage. However, closing your cards can lower your credit score if doing so will increase the credit utilization percentage for the remaining open cards.
14. Remove old financial associations.
If you are financially connected to anyone such as a former partner or housemates that you shared bank accounts with to pay bills, you’ll want to remove yourself from any such associations. Any bad financial habits that they have could affect your mortgage application, so you’ll want to remove these links from your record. You can do this by writing to the credit agencies and asking for a ‘notice of disassociation’.
15. Don’t accept too much gift money for your down payment.
If you have parents or relatives who are willing to provide gifts in the form of funds to put towards your down payment, this can take a huge burden off your shoulders. However, if you do not have your own funds saved and all or most of the down payment money is gifted, the lender could take the view that you won’t be able to afford the mortgage repayments on your own.
16. Check on joint applicants.
If you’re making a joint application for a mortgage, be aware that the lenders will also assess the creditworthiness of everyone that is applying. You will want to check that the person’s credit history is sound before making the application.
17. Don’t apply for credit shortly before a mortgage
Try not to open any new lines of credit or make any major financial purchases that will affect your current balances at least 6 months before your mortgage application. This is not the best time to get a new car. Applying for credit will knock 5 to 10 points off your credit score, and you’ll need all the points you can get to qualify for the very best rates.
18. Avoid Payday loans like the plague.
Some payday lenders suggest that taking them out and repaying on time can boost your credit score, as it starts to build a history of better repayment. This may be correct to a very minor extent for people with terrible credit histories – though using a credit rebuild card correctly is generally both more effective and far cheaper.
However, the truth is, payday loans can kill mortgages
Avoid payday loans like the plague. In fact, some mortgage underwriters have openly said they will reject anyone who has had a payday loan, as it’s an “…example of poor money management.”
19. Prepare to provide the required documentation.
Keep personal details the same between applications. It’s crucial to be consistent, even over long periods when you fill in application forms. If you have a number of job titles or phone numbers, try to use the same one on every form.
You’ll need to provide the following documents when buying a home:
- Previous 2 years’ W2 form.
- 30 days of paycheck stubs.
- Tax returns from the past year.
- Proof of additional earnings, such as alimony, child support, etc. (if relevant)
- A complete list of your debts, including credit cards, student loans, car loans and child support payments, along with statements that show balances and minimum monthly payments.
- An inventory of assets including bank statements, investment accounts, rental properties, retirement accounts and other major items of value.
- IRS Form 4506-T, which allows the lender to get a transcript of your tax return from the IRS.
- Proof of deposits (eg, savings account statements)
- ID documents (usually a passport)
- Proof of address (eg, utility bills or credit card bills)
If you’re self-employed, you’ll be required to show provide additional documentation such as profit and loss statements from your business or 1099 forms if you work on a contract basis.
Click here for 11 powerful strategies you can use to boost your credit score by over 100 points within 6 months.