Best practices: Qualifying for a mortgage
Tuesday, 5 January 2016
Buying a home can be the largest and most complex financial decision most of us will ever make.
In addition to questions like "Can I afford it?" there are documents you will need to provide to potential lenders. Here's some of our "best practice" tips that may help simplify this process and set you on the path towards your new home.
1. Make the first move
Talking to a reputable, qualified mortgage banker is an excellent first move. He or she can guide you through the process, helping you to assemble the required documentation, as well as explaining other factors and costs associated with buying a home (taxes, closing costs, insurance, etc.). They will work with you to help you decide on the mortgage that is best for you and your budget.
2. Gather up your paper trail
Lenders will need documentation proving that you have the ability to repay the mortgage loan. (If you are applying with your spouse, you will each need to supply proof of the following. Required documentation may include, but is not limited to, the following:
- Valid driver's license or state issued ID
- Social security card(s)
- Copies of your checking and savings account statements for the past 3 months
- Proof of other assets (like stocks or bonds)
- Paycheck stubs that show your current income
- A list of all revolving credit card accounts and any outstanding balances
- Documentation showing any other outstanding loans (like car loans)
- Copies of your past 2 years of income tax statements, including W-2s
- Proof of employment (usually the name and address of your employer)
- Copy of divorce decree (if applicable)
- Bankruptcy and/or foreclosure paperwork (if applicable)
- Letter of explanation for any negative account listed on your credit report
Additional documentation may be required.
3. Check your credit score
Your credit rating can directly impact your approval and mortgage rate. It's a good idea to check with all three credit agencies, as most lenders use a "tri-merge" credit score, which pulls data from the big three agencies (Equifax, TransUnion, and Experian). You may also want to check your credit report with the fourth major credit reporting agency, Innovis. Contact each credit agency to correct any errors on your report, and take any steps necessary to improve or repair your credit rating.
4. One mortgage size does not fit all
The amount of the mortgage you qualify for will depend on various factors such as your credit history and debt-to-income (DTI) ratio. The DTI ratio is the percentage of your gross monthly income (before taxes) that is used to pay your monthly debt. Example: If you make $5,000 a month gross, with a 41% qualifying DTI ratio guideline, your maximum monthly debt payments, including any mortgage loan payment, would be $2,050. A mortgage loan calculator is a good place to start. It will let you see how different down payments and interest rates can affect your monthly payments.
5. Be prepared for closing costs
Closing costs are the charges you may to close on your mortgage loan. These costs can include expenses such as for processing and recording necessary documents and points or fees charged by a lender to make the loan to you. As the buyer, you can often pay the costs in cash or finance them over the life of the loan unless you negotiated for the seller to pay closing costs. If Premium Pricing options are available, it is possible to obtain a No Closing Cost loan. Premium Pricing (lender credit) is a feature offered with some loans where the closing fees are automatically financed, but the interest rate may be higher. Your lender must provide you with a Loan Estimate when you apply for a mortgage. The Loan Estimate will generally outline the costs required to close your loan.
All credit and accounts subject to approval, including credit approval. BBVA is an Equal Housing Lender. BBVA mortgages are subject to eligibility, collateral and underwriting, and approval, including credit approval.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
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