How to Improve Your Mortgage Application

Industry Observer with ValuePenguin

The current housing market is tough on homebuyers. Housing prices are increasing, inventory is on the decline and interest rates are rising. Some reports are predicting one of the worst markets for housing affordability in recent history. In such a challenging environment, having a strong mortgage application will help maximize your chances of getting the home you want.

Tend to Your Credit Score
Your credit score affects your mortgage rate and loan terms, but it can also determine whether you get approved in the first place. Before submitting a mortgage application, you should request a credit report from one of the three major credit bureaus. Once you know your credit situation, you can take steps to boost your score and increase your chances of securing approval.

A good first step to improving your credit score is catching up on late payments. If your creditor was reporting these payments to credit bureaus, then paying the bills can lead to an increase in your credit score. Then pay down the outstanding balances on your credit cards and other loans. This helps your credit by reducing both your credit utilization ratio and your overall debt.

In addition, don't close out your unused credit cards before submitting a mortgage application. Keeping cards open with no balance is another way to lower your utilization ratio. However, this doesn't mean you should open new lines of credit for the sake of a better utilization ratio. Credit applications that are too recent will hurt your score more than the added credit will help.

Finally, thoroughly inspect your credit report. Errors are common and can have a material effect on your score. If you notice any inconsistencies with your own records, contact the creditor associated with the error and ask for a correction. You should also contact the credit bureaus and notify them as well. 

Understand Your Debt Ratios

Debt ratios are another important factor in improving your mortgage application. Mortgage lenders want to ensure you can afford the home loan you're requesting. Part of that process involves your debt-to-income ratio (DTI), which is equal to your total monthly debt costs divided by monthly income.

There are two types of DTI: back-end DTI includes all of your personal debts, while front-end DTI looks only at housing-related costs. Your front-end DTI is typically lower than your back-end DTI. All lenders set their own maximum DTI limits, but most will look for a back-end DTI under 43% and a front-end DTI under 28%.

You can lower back-end DTI by making extra payments toward the principal balance of your other debts. Consolidating your outstanding debt at a lower interest rate will also help lower your monthly interest expenses. Meanwhile, you should avoid adding any new debt in the form of financed purchases.

While it's good for your back-end DTI to make extra payments, keep in mind that you'll also need cash to qualify for your mortgage. Make sure you have enough money on hand to cover the down payment and closing costs needed to complete the home purchase. If you lack these upfront funds, mortgage lenders might see your loan application as too risky to approve.

In contrast, front-end DTI only includes expenses tied to your housing. This includes mortgage payments, property taxes, homeowners insurance and any other monthly costs of maintaining your home. If you already own a home, it's difficult to lower these fixed costs before submitting your mortgage application. However, you should think about how they'll change when you move.

Make Sure You're Buying the Right House

The listing price of a home isn't a real representation of its value to lenders, who will instead look at the appraised value or the purchase price written into your agreement with the seller. Appraisals are generally conducted after you are under contract, which makes it important to properly assess a prospective home for yourself prior to signing the contract.

Knowledgeable real estate agents can help you understand the true value of your home. As market experts, real estate agents can inform you of comparable sales in the area, which is a major factor in any appraiser's final evaluation. You can also refer to comparable sales data online to negotiate a fair price for your home.

The most direct way to determine value is to hire a professional home inspection. Professional inspectors will walk through the entire property and report potential concerns they spot. A good inspection will not only help you determine a home's present value, but it will also help you avoid the trap of costly maintenance problems down the road. 


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Joe Resendiz

Jr. Research Analyst
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