So, you were cooped up together all winter and realized you had fallen out of love… with your house. You stared at the same walls and little things started to drive you crazy… like that one crack in the corner, or the picture window without a view. Maybe the bedroom’s too small or the kitchen galley leaves no room to cook.
This is completely normal. Spring is the time of year when people get out and attend real estate open houses hoping to make a meaningful connection with a new home.
This year would actually be a great time to make the leap because mortgage rates are low. You could even refinance to a lower rate. (Don’t be discouraged if you’re underwater and were denied last year, because you might qualify under new regulations.)
First, you should get preapproved so you know what you can afford. The mortgage application process can be tricky. Here are some areas that could cause you trouble:
Poor Credit Score. The average credit score is rising as people are paying more attention to their credit. The better your score, the better your interest rate will be. FICO scores in the mid-700’s will get you the best rate.
Employment History. We all know that these are difficult times, and your employment will affect your application. If you’re newly employed, or there are unexplained gaps in your employment history, it can cause you trouble.
Compensation. This means income. If you’re like most people, your weekly employment check is your only source of compensation. Or, you could have a fluctuating income because you’re self-employed, or work in a field where bonuses and commissions make up the biggest portion of your salary. If that’s your situation, your lender will view your up-and-down income as a red flag. Can you make monthly payments if you have cash flow issues depending on the season?
Down Payment. Gone are the days of the zero down mortgage with 100% financing (meaning the bank gives you a loan for the whole sale price). If you can put a big chunk of cash towards down payment, and still keep a nice buffer in savings for emergencies, you’re going to look really attractive to the lender.
Excessive Debt. This can hurt you two ways – first by lowering your credit score and secondly by giving you a higher debt to income ratio. The lender’s going to wonder if you can make mortgage payments when you have so many other monthly payments on your plate already.
The number 1 thing you can do to avoid these issues, is to plan ahead.
1. Have money in savings to show the lender you can deal with whatever happens.
2. Pay down your debt, but don’t close your credit cards. You need to show you have a current credit history (ideally a minimum of 2 years and 3 creditors minimum).
3. Review your credit reports and correct any errors.
4. Take steps to improve your credit score.
5. Don’t make a big purchase just before taking out a mortgage. Don’t take out a car loan or lease, and don’t make a big purchase with cash. The first increases your debt and the second reduces your savings.
If you take some time to plan for your new mortgage, you’ll get the best interest rate possible for you. This is a great time to take advantage of those new low rates.