Lenders want to make sure that the mortgage loan you get will be used wisely - here’s how to show them that you’re a great mortgage candidate so you can get on your way to owning your own home.
Applying for a mortgage is an intimidating process, even to those who aren’t afraid of a little bureaucracy. With the wealth of paperwork, getting all your sensitive documents together (W-2s, tax returns, check stubs, SSN cards, the works), the mind-boggling terminology, all the contracts and clauses, and enough signatures to make your hand cramp, it’s enough to make your head spin.
And then, to do all that work, just to get denied by a lender - or even multiple lenders? The frustration is palpable.
So, how do you make yourself a better candidate for a mortgage? First, you have to know your “enemy” - the loan officer. You’ve got to know what that loan officer is looking for when he sifts through your pile of documents to make his decision.
When people think of loan officers, they often think of an old man in a starched suit at a bank with a sour look on his face who gleefully stamps “DENIED” in red letters on every application that comes across his desk. Missed a signature? Denied. Paperwork isn’t in the right order? Denied. 12 seconds late to signing? Denied. He finds fault with every application, every borrower, even the most perfect ones, because, well… that’s just how he is. No one is good enough to touch his bank’s money!
But that’s not the case at all: a lender who doesn’t loan out the bank’s money is a lender that doesn’t make the bank much money. Lenders don’t mean to be denial-happy crushers of homeowning dreams; they’re simply very careful with the assets entrusted to their institution.
Lenders want to see a “safe bet” - there will be no “perfect” borrower and banks know this. They want to see healthy money habits and behaviors over a long period of time. They want to know that you’ll make good financial decisions, commit to caring for the home, and you’ll pay your bills on time. They want to see financial stability as much as they want to see income.
So, how do you present yourself as a safe bet to a loan officer? That’s the million-dollar question (or more, depending on the property and where you live!).
Lending policies differ from institution to institution, but there are several things you can do to generally increase your marketability as a mortgage candidate across the board.
This is one of the biggest ways you can make yourself more attractive to loan officers. If you have $100,000 in yearly income, but spend $60,000 of it on credit cards, student loans, and/or car payments, a lender will worry about whether or not you can handle a mortgage payment plus all of your other obligations. Most lenders want to see less than 43% of your income going towards debts. There are different calculations that some officers might do, but 43% is a general rule-of-thumb.
So if you want a mortgage, pay down as much consumer debt as you can: pay off your credit cards, pay off your car payment, and take big steps towards taking care of any larger debt you might have (like student loans or medical expenses).
Decreasing your debt will, in many cases, also help with this next tip: improving your credit score.
Your credit score, which is calculated in different ways, is a general measure of how “safe” your spending habits are. There are various factors that contribute to your credit score (payment history, credit utilization, credit history, mix of different credits, new credit, etc.) and improving any one of them will improve your overall score. Most loan officers want to see a credit score of at least 580 (out of 850) in a mortgage loan applicant.
To improve your payment history, pay your bills on time, every time. Lots of late payments or fees will be a huge red flag to a bank, signaling that you might not pay your mortgage on time. If you have trouble remembering to pay, put your bill on auto-pay and make sure you always have a good amount of money in the account from which it drafts.
To improve your credit utilization, you’d want to spend 30% or less of your open line of credit each month. Spending more than 30% of your open credit signals to creditors that you might rely too heavily on credit to get by. If you want to make purchases but avoid using your credit cards, use debit cards when making purchases. Also avoid opening new lines of credit, as having too many open lines of credit can have the same effect as using more than 30% of one credit line.
An often-overlooked option to improve your credit score is to request your credit reports and check for errors. According to federal law, every consumer may request their credit reports once per year from each of the “big three” credit companies (Equifax, Experian, and TransUnion) for free. Request your free report from one company every four months to keep an eye on your credit throughout the year and check for errors. If the report shows a debt that you’ve paid or other incorrect information, contact the company and request a change. Give the company plenty of time to update your information before going in to apply for a loan.
Loan officers want to know that your mortgage payment won’t be in jeopardy - even if you have no debts of any kind, they want to know that you have enough money coming in to handle the payment.
If you get denied on the basis of income, ask your loan officer about how much you’d need to earn in order to qualify for the loan you want. Once you have that number, look for higher-paying jobs in your field.
You can ask your current boss for a raise, but it’s generally more difficult to get a substantial raise by staying with the same company. If you end up switching companies, you might be able to ask for a significant salary or hourly increase. In addition, you might consider some continuing education to invest in your own skills. Want to do some bookkeeping? Take some courses. Are you an admin for a law firm? You could look into the requirements for becoming a paralegal. All of these things increase the value of your time as a laborer and warrant more pay. You can even contact a career counselor or headhunter to help you define and meet your goals.
The one thing you SHOULDN’T do is get a part-time job; lenders will likely see this situation as temporary. As we said before, lenders are looking for long-term stability not short-term hustle.
The bigger the down payment you can put towards your home, the smaller the loan you’ll need - and, most importantly, that means less risk for your loan officers. Most loan officers look for 10 to 20% down on a house, so save MORE than these thresholds whenever you can. You may have other fees to look out for, like closing costs, insurance, etc., so it’s always good to have a little extra put away.
You can ask your lender for ways to make yourself a more attractive candidate for their loans. Lending requirements differ from institution to institution, so asking the loan officer about particular ways to improve (and doing them) will go a long way in helping you secure the loan you want.
Mark Klein- 132598
NW Mortgage- 128113