The Cobb Group Blog

Becoming a homeowner may be one of the most rewarding experiences you’ll ever have. But before you start picking out a living room set, you’ll want to take a step back and start with an essential part of the process: getting a home loan.

Though mortgages can seem complex, there are six steps every future homeowner should keep in mind to ensure a smooth and simple home loan process.

Work On Your Credit Score

As you begin looking at various loan programs, you’ll notice that the subject of credit score will often come up. This is because, like any large credit request, your history as a borrower is a significant factor. Your credit score is a summation of that history. Potential lenders review your credit report and credit score, along with other factors, to determine your ability and likelihood to repay debt.

According to Fair Isaac’s website (https://www.myfico.com/), credit scores are calculated from many sources of information in your credit report. They are “weighted” based on the following five categories:

• 55% Payment history: Were payments made on time?

• 30% Amounts owed: Is the balance owed close to the limit?

• 15% Length of credit history: How long have the accounts been open?

• 10% New credit: How many new accounts have been opened recently?

• 10% Types of credit used: Do you have mortgage, auto, consumer finance, revolving, or installment loans?

A low credit score can be a barrier to certain home loan programs. Fortunately, improving your credit score is simply a matter of responsibly exercising credit over time.

Stick to these points to help boost your credit score before you begin applying for a mortgage 

• Make sure the information in your credit report is correct. Check your report for accuracy. Act quickly to correct any erroneous information.

• Pay down your high credit card and revolving account balances. Lower your debts, but don’t close your accounts. Do not apply for credit that you don’t need since excessive credit report inquiries can lower your credit score.

• Avoid moving credit balances from one account to another to take advantage of low introductory interest rates. The combination of inquiries and new accounts can negatively impact your score.

Save for a Down Payment

While some mortgages require very little or even no down payment, such as FHA mortgages and VA loans, not every home buyer can qualify for these programs. You want to make sure you’ve saved up enough for a sizable down payment, so that your loan options remain open. Your down payment amount may reflect conditions such as your interest rate, whether you pay Private Mortgage Insurance (PMI), and what your overall monthly mortgage payment will be.

If you’re finding it difficult to raise the money for a down payment consider:

• Bringing food to work. Americans spend an average of $3,000 a year eating and roughly $12 a day on lunch alone. Put that money into your savings and brown bag it instead.

• Freelancing during your downtime can allow you to make a little extra money while picking and choosing the jobs you want. A short stint in the gig economy, for example, might be good enough to make a real impact on your savings.

• Asking family and friends may be the most  tried and true method for getting the funds you need for a down payment. Just make sure you document this gift money so that your lender can trace its origin.

Prepare Your Home Loan Documents

Once you’ve polished your credit score and you’ve saved up enough for a comfortable down payment, it's time to begin the process of getting a home loan. The first (and arguably) the most critical step is the pre-approval. A pre-approval involves an assessment of your financial position to determine how much you can afford.

Providing your mortgage lender with a handful of required documents will ensure that they have a complete picture of your history and can better help you get a home loan that fits your needs. Here’s what you’ll likely need to provide your Mortgage Loan Originator to get pre-approved:

• Past 3 years complete tax returns (all schedules)

• Past 2 years W-2 and/or 1099 forms

• Last 30 days pay stubs (including bonus and/or commission pay)

• Government issued Photo ID

• 2 months original bank statements (all pages) on all checking, savings, money market, IRA, mutual fund and brokerage (stock) accounts

Once you’ve been pre-approved, be sure to hold on to these documents. You’ll likely need to  reproduce them (with updates) during later stages of your home loan process.

Keep Your Down Payment Money Where It Is

During pre-approval most lenders will want to confirm that you have the available funds to cover not only a down payment but also closing costs. There are fees and expenses beyond the down payment that you pay once the home’s title is transferred to you at closing. These costs can run 3 to 5 percent of the loan amount and may include title insurance, attorney fees, appraisals, taxes, and more.

Once you’ve been pre-approved, it may be tempting to take the money for your down payment and closing costs, and move it to a new high-interest-bearing account or to make a short term investment while you shop for a home. Doing this may put getting a home loan in jeopardy.

To deter fraud, all lenders are required to examine the source of the money used for the down payment. If you move money too often, the trial gets complicated, and if there is even one detail missing, getting a home loan may be difficult later on. Transferring your down payment money is one of the few actions you want to avoid before buying a home.

Actions to Avoid Before Home Buying

Changing Jobs Before Closing Your Mortgage

There are several steps in your home buying journey. During one of them, your Mortgage Loan Originator will have to verify the information in your loan application. Changing jobs, becoming self-employed, or quitting a position during this stage means that your new income source has to be verified with questions like:

• Are you getting paid the same?

• Is the new job in the same industry as your previous position?

• Will your pay be commission-based, salaried, or hourly?

Employment reassessment may slow down the loan process, which may cause issues if you’ve found your ideal home and want to make an offer

In addition to slowing down your loan approval, lenders generally want to see a year or two of steady income that they can assume will last. If you’re thinking about following a new career path, your best bet is to save the move until after you’ve closed on your mortgage.

Making Large Purchases During the Loan Process

There are a few important numbers that factor into your ability to get the home loan you want. One number is your debt to income (DTI) ratio. Your DTI is all your monthly debt payments divided by your gross monthly income. It’s one way lenders measure your ability to repay; adding more to the debt side of this equation may adversely affect your chances for loan approval.

If you decide to purchase a new car, for example, then those car payments may significantly increase your debt. Before you make any large purchases, talk to your Mortgage Loan Originator to see if the subsequent change to your DTI will stall your home buying goals.

Changing Your Credit Card Usage

During an initial pre-approval, your Mortgage Loan Originator will check your credit to help you better understand what your home buying budget is. However, your credit may be re-run for any number of reasons during the loan process, including: 

• Verifying your debt obligation hasn’t changed during the underwriting process

• Adhering to new lending rules such as the Ability-to-Repay rule (of the Dodd-Frank Act)

• Performing a final credit check before closing to ensure your DTI hasn’t changed

If your credit card use has increased then your credit score will be affected. Your best bet is to keep making payments and keep using your card as you normally would.

Making Large Deposits without Talking to a Mortgage Loan Originator

If you make large deposits into your bank account, you’ll have more money for a down payment, closing costs, and other home buying costs. This might seem common sense, but the issue arises when that money needs to be tracked to its source. Fraud regularly occurs in the mortgage industry and large deposits that can’t be traced are a telltale sign for many of them including:

• Straw buyers – Individuals who purchase for someone else in order to circumvent legal restrictions

• Identity theft – Buyers who set up a bank account using someone else’s social security number

It may help to have documentation for your large deposits, but a simpler approach is to avoid making them immediately before or during the loan process. If you believe such deposit is necessary, talk to your Mortgage Loan Originator for advice about the best course of action

Increasing Inquiries on Your Credit

Applying for a new line of credit means generating an inquiry into your credit history. These inquiries can hurt your score, something you’ll want to minimize as much as possible during the mortgage process.

Be sure to ask your Mortgage Loan Originator for advice if you feel that you need to get an additional loan or credit card during the buying process

Talk to Your Mortgage Loan Originator

Preparation is key to home buying success, but knowing how to prepare and what to prepare for takes the guidance of a seasoned mortgage professional. Once you’ve decided you want to buy a home, it’s essential that you contact a Mortgage Loan Originator. Even if you’re not ready to buy just yet, they can provide:

• Education on what loan options make sense for your situation

• Advice on how you can improve your credit

• General information on getting a home loan and specific steps you can take to enhance your chances for success

• Connections to other trusted housing professionals who will make the loan experience simple, easy, and enjoyable

The mortgage process can get extremely complex but getting a home loan doesn’t have to be. Following these tips can help put you on the right track as you begin your homeowner journey.