6 Money Moves to Make for Tomorrow's Mortgage
Borrowers who start preparing for a mortgage loan long before they're actually ready to apply for one are making the right move. They can identify potential trouble spots early enough to resolve them before lenders start picking apart their financials. Prepping for your mortgage application as long as a year ahead of time? That's not a bad plan, say mortgage lenders.
Here are six steps you can take today to get ready for that mortgage application tomorrow.
1. Study Your Credit Report
Your first move should be to order your free credit report from AnnualCreditReport.com. You are allowed one free copy of your credit report from each of the three national credit bureaus — TransUnion, Equifax and Experian — every 12 months. Don't order your reports from anywhere else. Other sites might try to charge you or provide their own reports rather than those from the big three bureaus.
Once your report arrives, study it carefully. Your report will list basic information such as your name and address. But it also lists your open accounts. If you owe $10,000 on a car loan, your report will list it. If you owe $5,000 on a credit card, that information will be there, too.
Your report will also list any negative judgments against you. This could be something big, like a foreclosure or past bankruptcy filing. This section will also list late payments on student loans, car loans, credit cards, and other debt. These negative judgments can all cause your credit score to drop.
If you find any errors — maybe you never did make that late payment on your car loan, or maybe you paid off and closed that credit card account years ago — make sure to ask for a correction. This is easier today: Experian, Equifax and TransUnion all let consumers dispute report information online.
2. Get Your Credit Score
The information in your credit report is used to determine your credit score. Lenders rely on credit scores to determine the interest rates they charge consumers. And if your score is too low, you might struggle to qualify for a mortgage at all. Lenders today generally consider a FICO credit score of 740 or higher to be an excellent one.
Unlike your credit report, your credit score usually isn't free. You can order your score from any of the three credit bureaus. If your score is low — say, under 700 on the FICO scale — it's time to take some steps to boost it.
3. Pay Down Your Debt
If you are using too much of your available credit, your score will suffer. Pay down as much of your credit card debt as possible before you're ready to apply for a loan. But be careful. It often doesn't make sense to completely close a credit card account. If you close a credit card — and take away that available credit — the percentage of your credit that you are using could automatically soar. Better to pay off your credit cards but not close them.
Framarz Moeen-Ziai, senior vice president of national sales and production for San Ramon, California-based Commerce Home Mortgage, says that credit card management is key for consumers preparing for a mortgage application.
"Some people live their lives on mileage cards. They charge everything because they want to earn their miles. Then they pay off the entire balance at the end of the month," Moeen-Ziai says. "That's fine. But what if we get your credit information at the same time you have $7,000 or $8,000 worth of charges on a card with a balance of $10,000?"
Moeen-Ziai says that he's seen big credit swings because of balance management.
"If your balance is zero, your score is 770. If it's nearly maxed out, it might fall to 700," he says.
4. Pay Your Bills on Time
The other big drag on your credit score? Missed or late payments on credit cards, auto loans, student loans, and other forms of revolving credit. Resolve now to never again make a late payment. Your score will gradually rise as the months of on-time payments pass by.
5. Calculate Your Debt-to-Income Ratio
Lenders prefer to work with customers whose debt-to-income ratios are 43% or lower. What does this mean? That your total monthly debts, including estimated monthly mortgage payments, equal no more than 43% of your gross monthly income. If your debt-to-income ratio is higher than 43%, it's time to either boost your monthly income or pay down as much debt as possible.
6. Talk to a Lender
You might think you're wasting a lender's time if you're not prepared to apply for a mortgage loan in the next three, six, or even 12 months. Stop thinking that way. The sooner you speak with a mortgage lender about your finances, the more time you have to prepare for a mortgage. And just because you talk to a lender, doesn't mean you have to actually take out a mortgage loan with that professional.
"My advice is to call a lender as early in the process as you want to," says David Atis, senior loan officer with Home Point Financial Corporation in Parsippany, New Jersey. "You want to work with someone who is ready to go on the journey with you, not someone who refuses to work with someone who isn't going to close in the next 30 days."
Did you prepare for a mortgage application in advance? What steps did you take?
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