How To Position Yourself In Advance So That Getting A Mortgage Is Easier
By Doug Goelz, Mortgage Services
Thinking about financing the purchase a property? Here are some things you can do in advance of applying for a mortgage or getting pre-approved that can improve your chances of getting the loan, and make the process simpler and easier.
- Check your own credit report before you talk to a lender. You can go online and buy a credit report that will give you your scores and credit information. That way, you can make sure there are no surprises when your lender obtains your credit during your pre-approval process. In order to get a credit report with all 3 credit scores, you will need to buy it (it will cost about $40). Free credit reports do not provide enough information to thoroughly review your credit position. When you get your own credit report, it does not count as an inquiry on your credit report, so it will not hurt your credit scores. Once you have detailed information, you can follow up on anything that needs correcting, before your lender obtains your credit report.
- Don’t open new credit accounts.This includesopening accounts in stores when they offer a discount on purchases “if you open an account today.” A new credit account can hurt your credit score within the first six months of opening.
- Avoid major credit purchases. If you can, wait to buy the new car until after you have bought the house. If you don’t currently have a car payment, taking one on can significantly erode your borrowing power with a mortgage. A new car payment of $600 will reduce the amount you can borrower by over $100,000.
- Pay off or pay down your credit card balances BEFORE the end of the monthly cycle. Generally, credit reports reflect the balance on your last credit statement. So, even if you pay off your credit card each month, your credit score and credit obligations are based on what your credit statement shows. If it is your practice to pay off your credit cards each month, look at the balance online shortly before the end of the cycle and make your payment then. That way, when the statement is produced, it will show a small or $0 balance and no or low payments.
- Distribute the amounts owed among your credit cards. Credit scores take into account how much of the credit available you use on each credit card you have. Your credit score will be much lower if you have a $5000 balance on a single card with a $5000 credit limit, than if you owe $1000 each on five cards each with a $3000 credit limit. If you can, avoid maxing out any one card by spreading your purchases (and reimbursable business expenses!) among several cards.
- Get your gift sooner. If part of your down payment will be from gift funds, the documentation of the loan will be simpler if the gift has been sitting in your bank account for at least two bank statement cycles by the time you apply for a loan. Of course, there generally is not a problem if you get a gift at the last minute, but documenting the gift can be a hassle.
- Limit transfers between accounts and large deposits and credits. Large deposits and credits on any of the bank accounts you include with your mortgage application (you usually have to provide the two most recent statements for any bank or financial institution accounts) have to be sourced and documented. You may think consolidating funds into one account will make it be easier when you have to come up with the down payment, but any convenience then may be offset by all the documentation you have to gather to show the source of funds going into the single account.
- Stay salaried! Considering doing what you do as a consultant or free-lancer instead of as a salaried employee? In general, you need two years filed tax returns showing self-employment income before a lender will count any of is as qualifying income. Even if you quit a salaried job and do exactly the same thing as a consultant for a higher rate, the lender will not count your new self-employed income until it shows on your tax returns for 2 years.
- Get salaried! If you have been self-employed and have shown a low net income on your tax returns (because of deductible expenses, taxes, and retirement contributions), if you become salaried in the same line of work, the lender will count your new gross salary (before deductions) as soon as you have a pay check.
- Exercise the options and RSUs (Restricted Stock Units) you are going to need for your down payment. When a lender looks at assets, they don’t count options or RSUs (even if they are vested). If you know you are going to buy a property using cash from the sale of options or other restricted shares, exercise them earlier and on your own timetable. You don’t want to get squeezed by a down market that occurs while you are in a 25 day escrow and obligated to come up with a lot of cash within a couple of weeks. Plus, for large loans with significant reserve requirements, the lender will need to see the funds from exercised options or RSUs before counting them towards reserves.
- Increase the net income you report on other properties and businesses. In general, with other properties and owned businesses, low net income can be good to reduce taxes. However, low net income or losses on Schedules C and E of your taxes can reduce your borrowing power. Consult with your tax professional about limiting the expenses reported on your taxes in order to increase your net income. You may pay more in taxes that year, but the higher net income may significantly increase your borrowing power.
Questions? Feel free to get in touch with me at 415-730-4665 or email@example.com