“Spectacular achievement is always preceded by spectacular preparation.”
- Robert H. Schuller
Prepare ahead of time. The following steps should be taken care of roughly 4 months before the date you are ready to sign your loan papers. It takes time for all these things to reflect on your credit.
Pay off as much of existing debts as possible
If you are making $10,000 a month after taxes but over $6,000 is going to your car loans, credit card payments, and other revolving payment plans, you might well get denied for a $400,000 loan request. The bank will only see your income after the payments to the revolving debts every month. For the same income above if you only have $2,000 going to your revolving payments, your finances look much stronger.
Get your credit report from all 3 reporting agencies
This is probably THE MOST IMPORTANT part of your preparation. This is the bank’s primary source of your financial well-being. Get these reports and read them through thoroughly. Verify everything from the spelling of your name, former residences, to the bank and credit accounts they have on profile.
Fixed mortgage rates corresponding to various FICO score
Correct ALL errors on your credit reports
This can usually be done by contacting the credit reporting companies directly. Another type of error that you don’t want on your credit reports is referred to as “derogatory comments.” These include such comments such as delinquent, overdue, or long overdue. Any of these will become a big NO on your loan application. If you do get approved, you will end up paying ten’s of thousands extra to the higher interest rate.
Do not apply for any other credit lines in the mean time
Any applications for lines of credit will require a hard pull on your credit and will result in a drop in your credit score. So hold off on that new purchase! You will have plenty of time for sales after you home finances are done.
Consistent income indication for last 6 months
Lending institutions want to make sure your stream of income is steady as they want to receive your monthly payments. Nothing speaks better than a string of pay stubs couple with a letter from your employer (yes, be nice to the HR person!) stating your length of employment and current salary.
Have money in your bank account
The typical amount that the lenders want to see is something between 5% and 20%, indicating you have the down payment ready. Have this sitting in your bank account will make your words louder when you are sitting on the table negotiating for the loan.
Get quotes; don’t commit
Many lenders may be hesitant to give you an exact quote without you filling out the application and performing a hard credit pull. This is why you need your credit report as well as your pay stubs, letter of employment, and bank statement in hand. With these documents in hand, they should have sufficient information in hand to give you a very close quote. Don’t commit to anything on the spot regardless of what they say. Get at least a dozen of quotes before you assess them. Use the free online mortgage services. Just stick to the rule: No credit pulls and insist on using your own credit reports and score until the real deal.
Let them compete – when they compete, you win
Just like buying a new car, let them compete for your business. Feel free to challenge them with the lower rate and fees that the other lender is offering and see if they can beat them.
Summary of Steps:
The first 3 steps should be done roughly 4 months before the clock strikes. The next 5 steps should be done immediately afterward.
Pay off as much of existing debts as possible – credit cards, car, etc.
Get your credit report from all 3 reporting agencies.
Correct all errors on your credit profiles.
Do not apply for any other credit – credit card, car loans, or anything that will require a “hard pull” on your credit report.
Consistent income indication such as pay stubs for the last 6 months.
Have money in your bank account.
Get as many quotes as you can but don’t commit to any of them on the spot.
