Tuesday, May 29, 2012

How to Prepare Your Finances Before Applying for a Mortgage

mortgage road signs
Preparing for a loan application involves far more than just filling out the application form correctly. A significant amount of work needs to be done to make sure an applicant’s financial records and finances are in proper order. This involves reducing debt as much as possible, increasing savings and assets, and having records in order to show a stable income that pay off the mortgage approved. While it’s an easy sentence to read or write, getting all these details in order in real life can be a challenge.

Clear Out Any Debt Possible

Lenders are not keen on providing a large loan to a borrower already leveraged on too many other loans. This can include credit cards, consumer loans, and other financing that clearly eats up available income. Whatever the case, these outstanding debt accounts need to be lowered or eliminated as much as possible. When a lender reviews an application, every outstanding loan is a mark against an applicant. Mathematically, loans work against a borrower in loan-to-income ratios. Student loans and car loans are fixed with traditionally low rates, so they are looked on kindly. However, credit card and no-collateral debts are considered problematic. The more of these loans an applicant has, the worse the application rating turns out.

Solidify All Proof of Income

The more income a borrower can show he makes monthly, the better is application will be. However, there’s a catch. Most institutional lenders only recognise income as proven by a regular salary and stub. Those who have such documentation simply need to bring their salary stub with them when meeting with a loan officer to show proof of earnings. Those who earn income on a freelance basis or as their own business have it much harder. Lenders don’t generally like to recognise independent income because self-recorded documents can be quite easily fabricated. Because of this reason, a borrower will need to bring tax returns as well as various accounting forms received from contractors and clients to adequately prove income. Those who can show proof of an employer as well as extra income are in the best of both worlds, being able to document a maximum level of income to pay off a loan. However, the borrower still needs to be able to show the income is steady and occurs monthly.

Prove a Down-Payment Ability

Up until 2007, borrowers could get loans with nothing down in terms of cash paid for the house. However, after the real estate crash the following year, lenders and the finance industry became very conservative and have stayed that way since. As a result, borrowers now have to have what’s called “skin in the game,” or a sizeable down payment. By producing a payment of at least 10 to 20 percent of the purchase, the borrower signals seriousness in committing to the purchase. It also reduces the lender’s risk in the amount financed for a mortgage. To prove a down-payment capability, the borrower needs to not only commit to the payment but be able to show he can actually pay the amount. This means producing bank records for savings accounts, checking, bonds and CDs, and any stock portfolios. The combined assets in aggregate prove the ability to make the down payment required.

Don’t Forget the Credit Score

If a borrower has a poor credit score due to past financial problems, waiting a little bit before applying for a mortgage may be a good idea. Bankruptcies and bad payment histories only affect a score for up to seven years, but if they are present on a credit report they cause havoc to new loan applications. Ideally, a borrower should have above a 680 FICO score (700 is better). Lower than 680 and more work needs to be done prior to applying for a mortgage. For more tips on getting approved for a mortgage and to read up on what mortgages you could get, we'd advise visiting the Mortgages.co.uk website. Getting a mortgage is more challenging now than it has been for many years, and with the chaos in Europe, things might even get worse than they already are. Here's the key takeaway: get your finances in shape before you even consider filing that application!

Guest Blog Article By:

Andy Boyd
Andrew writes about managing money and personal finances for various multinational companies. He is also a keen follower of technology