There is much debate among investors as to which method of obtaining a loan is best: a large national bank, a mortgage broker or even your local credit union. The answer ultimately lies with what you are looking to do and what kind of a borrower you are. In order to determine your strengths and weaknesses, you should do some self-evaluation before you ever apply for a mortgage. If you know where you stand before the process, it will help you choose the path that is best for you. The mortgage process may seem intimidating, but in reality it is not nearly as complicated as it appears.
The first step is finding out your current credit score. This is the starting, and possibly ending, point of the entire process. There are many websites that you can get a copy of your up to the minute credit report and score. A good score is anything 680 and higher. Many of the investment programs need a minimum middle score out of the three reporting agencies of at least 720. Anything less than a 640 would make it very difficult to do much of anything. Once you know your score, you know how strong of a borrower you may be. However, the score is just the first piece of the puzzle.
Your credit report will have a list of all your monthly obligations that are used for qualifying purposes. Lenders will take the minimum monthly payments for these items and divide them by your gross annual income. This number may be tricky to get if you are self-employed, but even so, you will still need your monthly debt number. Items such as groceries, oil bills and utilities are not on the credit report – only installment obligations are noted. Add up all of your debts and your proposed mortgage payment and divide that by your gross income or the average gross income over a two year period if you are self-employed. What you get is your debt to income ratio which should be under 45%. If you are over 50%, you may have a tough time getting approved. If you are much lower you know you are working from a position of strength and should make the approval process easier.
The final piece in the approval puzzle is your assets. Lenders will need to see that your down payment is “seasoned” in your account for at least 60 days. If you need to transfer any funds to an account and you are actively looking you should do so as soon as possible. Additionally, lenders may look for extra reserve months of payment but this money does not have to be liquid and could be in the form of a 401K, stocks or even bonds.
Credit score, debt to income ratio and assets make up the mortgage approval process. Obviously, there is much more that goes into it, but this is your starting point. Between online credit scores, mortgage calculators and interest rate estimates, you should be able to have a very good idea of what you are qualified for before you pick up the phone and look for a mortgage. Who you decide to call is up to you but if you do a little legwork before you start you will be far ahead of the game.
