Design & Build Magazine May/June 2015

TalkOfTheTrade
Finance
Consider This
Aceing your mortgage application
Applying for a mortgage is a major milestone in
your life. It signifies the purchase of a home and
the achievement of the American dream. To
make sure that the American dream doesn’t turn
into a nightmare, several items must be considered
before submitting your application. Mortgage
companies will look not only into your current
financial situation but also your ability to pay
long term, especially considering the fact that
your mortgage will be for 15 to 30 years. Below
are the five factors which are most important for
putting your best foot forward to
qualify for a mortgage.
FIRST YOU WANT TO CONSIDER IF YOU CAN AFFORD
the mortgage for which you are applying. Generally
speaking you should not purchase a home which is more
than 3 times your annual salary. In the same vein you
should not obtain a mortgage which accounts for more
than one-third of your income. Assuming there is no major
change in your income during the term of your mortgage
this should ensure its ongoing affordability for you
and your family.
The second item to consider is the amount of the down
payment. A target goal should be 20% of the purchase
price for your new home. If you are unable to make a
down payment of 20% you typically will have to purchase
insurance which protects the mortgage company
from default. This insurance is called private mortgage
insurance and will remain a portion of your monthly payment
until you reach at least an 80:20 ratio in debt to
value. If you are unable to make a 20% down payment,
one potential workaround to avoid private mortgage insurance
would be to finance 80% of your loan through a
first mortgage and the remaining amount through a second
mortgage. You will need to discuss this with your
mortgage broker to determine if it is an option for you.
Applying for a mortgage will require a strong credit
score. In order to build your credit score consider obtaining
a credit card and using it for everyday purchases. At
the end of each month pay off the entire balance. After
doing so for 12 consecutive months you will see an increase
in your credit score. You can also build credit by
making on time car payments. If you initially do not qualify
for a mortgage, try purchasing a home through your
local bank and making on time payments for a period of
12 months. Building your credit demonstrates to your
mortgage company that you are a good risk and your
chances of approval improve exponentially. Your credit
score will likely be the determining factor as to whether
you receive mortgage approval.
In order to demonstrate to the mortgage company that
you are a good candidate, you need to have been employed
for a period in excess of one year. Job stability
shows a funding stream that will be used to pay back the
mortgage. Your mortgage broker will require copies of
two or more years of tax returns, as well as W-2 and pay
stubs showing continued employment. It is also typical
for a mortgage company to contact your employer to
verify employment during the loan process and sometimes
on the day of closing. You will also be asked to
sign documentation which states that your employment
is unchanged and that your income is the same as what is
reflected on your loan application.
The final thing to consider before applying for a mortgage
is that you have not requested credit for any other
large purchase at the time of your mortgage application
or while your mortgage application is pending before
closing. During the underwriting process the mortgage
company will review your income and credit history to
make a determination as to whether they believe you
can meet the terms of the mortgage. If you have recently
made a new debt obligation, it will be hard to determine
whether you can effectively service that debt in addition
to your new mortgage. Once you are approved and preparing
to close, if you were to purchase a car or boat,
the credit used could be detrimental to your mortgage
approval. If new credit is applied for and received during
this period, oftentimes your mortgage approval will be
withdrawn and the mortgage company will be unwilling
to move forward with your loan. A good rule of thumb is
to avoid applying for any new credit during the six-month
period before applying for your mortgage and under no
circumstances should you apply for new credit after your
mortgage approval before your closing.
Applying for a mortgage is a daunting task. There is
a mountain of paperwork and requests for income verification,
credit and job history. The process will be time
consuming and sometimes frustrating. By considering
the five factors outlined, you should have a smoother
experience with your mortgage broker. If you are able
to address these matters before completing your application
and your mortgage is affordable according to your
current income then getting approved for a mortgage
should be attainable. Each mortgage company has different
guidelines for approval, but improved credit scores,
a solid down payment and a demonstrated ability to pay
will go a long way in approval of a new mortgage and
attaining the American Dream by buying a new home.
DB
Written by Lee Abney
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