Buying a home can be stressful, and getting a mortgage may be difficult. Slightly more than half of all applicants for a mortgage are successful today, according to Ellie Mae’s April 2013 Origination Insight Report. And that’s an improvement; two years ago, only 47 percent of mortgage applications succeeded.
Mortgage originators have tightened their standards to reduce risk in the wake of the defaults and foreclosures that have cost 4.4 million families their homes. Many applicants don’t have the income or credit scores to meet today’s standards or are carrying too much debt to qualify for a mortgage.
However, some applicants fail because they simply don’t bother to provide adequate documentation—or they don’t know how to improve the odds that they will be approved for a mortgage.
These six secrets of getting and saving money on a mortgage can mean the difference between buying and losing the home of your dreams.
1. Get your documentation in order before you apply.
When it comes time to apply for a mortgage, many buyers are busy people. They are rushing to meet deadlines for the house they want to buy or getting ready to sell the one they already own in addition to all the other things going on in their lives.
It’s easy to leave until the last minute the task of getting together the documentation you will need for a mortgage: three years of tax returns, pay stubs, securities, and letters from employers, proof of child support payments and alimony, consumer debts, 401(k), tax liens, and more.
If you forget an important document, at best it will bring the processing of your application to a halt. At worst, you won’t qualify. Documentation for a mortgage is too important to leave to chance. Review with your lender or real estate agent everything you will need and get the necessary documents together in advance. You’ll discover some things might take some extra time to obtain, and you’ll be glad you started early.
2. Work on your credit.
You also need give yourself some time if you intend to improve your credit score. Pull your credit report from annualcreditreport.com—it’s free one time each year, and the site gives you access to reports from the three nationwide credit reporting agencies. If you want to monitor your credit more closely, consider signing up for a subscription service that will alert you to changes in your credit file.
Pay every bill on time or early. Don’t apply for more consumer credit. Dispute any errors you find on your credit report. Don’t call five lenders to start the mortgage application process; they’ll all pull your credit, and that could negatively impact your credit score, depending on when the lenders look at your report in relation to one another.
The median FICO score for approved mortgages this spring was 746. Remember, the better your credit score, the lower your interest rate may be.
3. Don’t mess with your credit through closing day.
More than one lender has pulled an applicant’s credit on the day the applicant was set to close on the loan, only to discover that the applicant has made a major purchase on a credit card, sending his or her debt-to-income ratio through the roof.
Before closing day, don’t buy anything on credit, co-sign a loan, or miss a payment on one of your accounts. And don’t open any new credit accounts until the ink is dry on your HUD-1 form (the form that lists the final closing costs and fees for your loan that must be provided to you one day before closing).
FYI: This spring, the median debt-to-income ratio—including the amount of the proposed mortgage—was 35 percent, according to Ellie Mae.
4. Put down more than you have to.
No, I’m not kidding you. Putting a little extra money down on your new home could be the single most important thing you do to nail down a mortgage because it does two things. First, it reduces the amount you will have to pay over time and saves you the interest that you would be charged in that time. Second, it lowers your loan-to-value ratio, one of the three key measures lenders use to assess an application (FICO score and debt-to-income score are the other two).
Last fall, a survey of Realtors found that 11 percent reported a contract was cancelled and 9 percent reported a contract was delayed because an appraised value came in below the price negotiated between the buyer and seller. By putting a little more down, you give yourself a greater cushion between the amount of the loan and the value of the home.
In the event the appraisal values the home at less than expected, this cushion protects you from losing the contract and the home or having your closing delayed. Should your appraisal come in too low, you might weather the storm if you have lowered the amount you will need to borrow with a larger down payment.
5. Close on the last day of the month.
You start owing interest the day you close, and you have to prepay the interest on the remainder of the month when you close the mortgage. But if you close on the last day of the month, you won’t have to prepay any interest.
The closer to the beginning of the month you close, the greater your prepaid interest fees are going to be at closing. The closer to the end of the month you close, the lower your prepaid interest charges will be, which can save you some cash at closing.
6. Shop for your own closing services.
When your application is received, your lender will send you a document called a good faith estimate (GFE), which lists the costs you will incur when you close on the loan. These are only estimates, and you can use your own vendors for certain services, like title and home inspection. So shop around—if you can find quality providers who charge less than what you were quoted by your lender, you can save thousands on closing costs.
Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.
Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.