Pre-Application Process
There are three items that are necessary before you get a loan application. These items are (1) checking your credit report; (2) figure out the maximum monthly payment including taxes and insurance you feel you can afford; (3) Find a loan product that fits your needs; (4) Gather the information need for you loan application.
Item 1: Credit Report:
This section will give you how to get your credit report improved. Click here if you want to know how to obtain a credit report: Make sure any credit report you get is from all three credit bureaus and has your FICO credit score on it. You need to check your credit report two things: first, you need to see that the information listed is accurate. Some figures show that up to 90% of all credit reports are inaccurate. Second, you might need to do things to improve your credit scores. The mortgage company uses the middle score of the report, so if your FICO scores are:
Experian: 674
TransUnion: 668
Equifax: 694
The middle score being used is 674, listed in bold. This is good enough to get a loan, but if your middle score is 680 or above it might cost you less. You are 6 points short of getting what you need. Important score ranges are 580, 640, 680, and 720. At less than 580 you will have a problem getting any zero down payment loan. It is possible to get one through FHA, since they have no minimum score, but many lenders are not accepting less than 580 at this time. At 640 you can obtain mortgage insurance for conventional loans, if required, you should also credit qualify for a government or conventional loan (maybe not a Jumbo). At 680 you rates could decrease and you should credit qualify for most programs. Finally at 720, you will generally credit qualify for nearly all programs. Credit qualifying does not mean you are approved. You will still have to qualify for credit ratios, job stability, and have enough verifiable assets for your closing cost and down payment.
How to improve your credit scores:
- Make sure everything on your report is accurate.
- Pay your bills on time. The greater time from your last late payment the higher your score improves. On FHA loans, if you have had past credit problems, an underwriter will not generally approve a loan unless you have no further late fees for the past 12 months.
- Paying down any or all REVOLVING accounts (credit card accounts) to 49.99% or LESS of the amount of your credit limit will increase your score.
- Paying down your any or all REVOLVING accounts to 29.99% or less of your credit limit is even better and will increase your credit score more.
- Get rid of open balance accounts if you have more than five open revolving charge accounts. (This is best for a person who has a 680 score or better).
- If you have low credit scores (under 580) open a revolving credit account, but leave it at zero balance. This can increase your score up to 40 points.
- Do not get or try and get any new credit. Every inquiry on your credit report will decrease your credit score.
- Do not shop for any credit. Don’t go looking at cars, furniture or anything where the store or dealership will pull your credit. They often lie and will pull it if you sign something. This WILL lower your score.
- Do not add any new debt of any kind until you have closed your home loan.
Item 2: Maximum Monthly Payment
There are two important factors in this step: (1) What payment do you personally feel comfortable making; (2) What payment can you qualify for the proper mortgage product for your situation. The first question only you and your family can answer. Before starting this process, you should put a budget together and see what you feel comfortable affording. Get the figures for taxes and insurance and get the total payment you wish to make. (I know everyone wants to pay nothing and get a mansion, but be realistic). Don’t get a loan with a higher payment than this number, even if the mortgage company states you can afford more. If you get more you will have to change your lifestyle you are living. That is why you start here first.
The mortgage company will get you approved using an automated underwriting system (AUS) computer program. This approval is based on proving out the information that was placed into the program. It uses many factors including: income and money in bank and stock accounts, credit scores, job history and other items. Depending on the situation your front-end (credit ratio) and your back-end (debt ratio) might be higher or lower that the traditional 29 and 41% for government loans or 28% and 36% respectively for conventional loans. Since the AUS underwriting system uses the ratios as only one factor you cannot go by ratios exactly. It is best to give the mortgage company everything that they need for the Loan Officer to run the AUS approval. Remember any computer is only as good as what you put into it. The old adage applies: garbage in, garbage out, so take your bank statements, and W-2’s and recent check stubs with you when you take an application.
Item 3: Finding the loan product you Need
For a detailed description on many loan types, Click Here. A knowledge loan broker or mortgage banker can give you better insight than our questions we have, but they should be able to answer in a logical way why you should get another loan, which is not recommended. There be other circumstances that apply the make since; just understand your needs and the program you choose. You, not the broker of banker will have to live with the consequences.
There may be reasons why the mortgage company representative might lead you to another product that may not be the best for you and your circumstances. One reason is that they might make more money selling another product. A second reason, is that they don’t know how to do the loan that would be best for you. Another reason is their company may not sell the loan product that is best for you.
Item 4: Gather the information you need for a loan application:
I will give you a list of the items you will need for your loan application. What most people don’t realize the information place on the application is what will be used to approve your loan. If the information is significantly incorrect, it could be considered fraud. Also the approval you received for your loan will be worthless. Again the adage garbage in, garbage out will apply. The only problem with giving wrong information is that you then plan on your move into the new house. So give the information to the loan officer that is required for the file. Here is what probably be required:
For Income:
- W-2 for the past 2 years
- Check stubs showing you year to date income (you will need the previous 1 month’s worth of check stubs.
- If you are self employed or receive much of your income via commission. You will need the previous 2 years tax returns.
- If self-employed you may need a Balance sheet or Profit and Loss Statement, but not always. (NOTE: self-employed means that you own at least 25% of a corporation).
- If you get a pension, Social Security or VA benefits, you will need a copy of our annual benefit letter.
For Proof of Assets:
- The previous three months bank statements for ALL accounts. (You may have plenty of money in one bank, but by having more cash in other accounts, it will be easier to qualify for the loan).
- Quarterly or monthly stock statements from brokerage firms.
- 401K account statements (especially if you are getting money from this account).
Other items:
- Driver’s License and Social Security Cards
- Divorce degree (if applicable).
- Landlords Name address and phone number for the past two years.
- Employer’s HR department address and phone number of each employer for the past two years.
- If you rent or have other property bring the property address, copy of any leases, and the mortgage company you pay.
- A list of creditors, which you should have from the credit reports you have.
- Sales Contract if you have one yet.
If the loan is a refinance, bring you old HUD I Closing Statement, title insurance policy and hazard Insurance policy.
