By Patricia Spangler

Dos and Don'ts When Preparing for a Mortgage Loan

If you’re like most Americans, home ownership equals living the dream, no matter the stage of life. Mortgages help home buyers in any season leverage someone else’s money to achieve personal goals, so it pays to plan. Mortgage lenders look at income, assets and credit when weighing risk to loan; but, according to Allison Tremper of The Mortgage Firm, the driving factor for the amount you can borrow is debt-to-income ratio; so give this consideration in your
prep too. Whether you are a first-time buyer; moving up with growing needs; regrouping after a major life-change; buying a vacation or investment property; or downsizing to realize other goals or enjoy retirement without the responsibilities of a large home, heed these dos and don’ts important to lenders because an address change with accompanying mortgage can improve where you live or even free up capital.

If employment income will be used to qualify, most lenders expect about a two-year history in the buyer’s current field and income level. In some fields of employment, keeping track of tips will be important during the period before applying for a loan. Do maintain a paper trail to prove a track record of these types of earnings. The two-year period of employment is a general rule of thumb rather than a requirement, since many people will seek mortgages at a stage of life when employment will not factor in as much. For instance, if the buyer is retired and seeking to downsize, income generated from assets rather than employment, will carry the weight to mitigate a lender’s risk.

Always Have a Paper Trail

Since assets play an integral role in qualifying, it behooves borrowers to again be certain a paper trail exists for assets used for downpayment and closing costs. Don’t plan to call in a large cash loan from a family member with no documenting paperwork right before you apply, and don’t keep savings in a desk drawer. Do create a consistent record of trackable savings and avoid large anonymous deposits prior-to and during the home-buying process. Unexplained deposits can be red-flagged by lenders similarly to racking up large debts before applying or while in the process of closing on a new mortgage.

Obviously credit is given a great deal of weight by lenders. Do maintain a variety of manageable debt with a track record of on-time payments, which bolsters your credit score and proves your trustworthiness as a good credit risk. However, too much debt can prohibit a loan for the amount you prefer. Though there are exceptions, in general, lenders will qualify a borrower with a maximum of 43% debt-to-income ratio. This means all debt payments, including your new mortgage, can only account for about 43% of gross income (before taxes and other deductions). To get this number, add up monthly debt payments and divide the total by gross monthly income. For example: if all debt payments are $2500 per month and gross earnings are $5800 per month, debt-to-income ratio is roughly 43%. So, make sure your debts
are paid down sufficiently to allow room for the mortgage payment.

Watch Out for Credit Purchases

Don’t ever finance a car or purchase anything on credit after you’ve applied for a mortgage even if you plan to pay it off before your first installment is due! Changes to your debt-to-income ratio will bring the closing to a screeching halt and will likely result in loss of earnest money deposit, monies invested in inspections or prepaid fees plus the house itself. Lenders are, however, permitted to disregard existing debts, like a car payment, that will be satisfied in ten monthly installments or less; so don’t necessarily to wait to find your next home if your car will be paid off soon.

Once you’re set to move, having considered income, assets and credit with a 43% debt-to-income ratio in mind, you’ll be ready to qualify for a mortgage that meets your goals and gets you into your new home. But remember, don’t go shopping and charge new furniture the day before closing or you will have lovely furnishings with no place to put them!

Written by Patricia Spangler, REALTOR®

Patricia Spangler is a licensed REALTOR® with Pastermack Real Estate located in Merritt Island, FL. Patricia is dedicated to helping her clients, and providing them the best real estate experience possible!