Applying for a mortgage is like getting ready for an important appointment: You want to look your best and have no surprises. That's why it's important to review your personal financial records even before you begin house shopping. You'll get the best rates and fastest approval if your credit history is clean and your finances are in order.
Most lenders sell their mortgages to federally sponsored agencies such as the Federal National Mortgage Association, better known as Fannie Mae. It has specific requirements for borrowers; meet them and you're on your way.
Here's what you need and how to get ready:
A clean credit history
Lenders want borrowers who have no negative items on their credit report --
no defaults, no late payments, no bankruptcies. You might think you have "A"
credit, but odds are 1-in-4 that there's an error in your report. Find it first,
before the lender does, by getting a copy of your report from a major credit
bureau such as Experian, Trans Union or Equifax.
Look for mistakes, such as accounts that are not yours. First, contact the creditors by phone or mail and correct the report. Then get another copy of the report 30 to 60 days later to make sure the corrections have been made.
Trim credit
card accounts and balances
Lenders look at how much debt you have and what you might take on. The fewer
cards you carry -- and the lower the balances -- the better. That's especially
true if you have other debts such as a car loan. However, don't pay down or
pay off balances with cash intended for a down payment.
The easiest way to improve your debt picture is to close all dormant credit card accounts. Contact card issuers and ask for instructions on closing the accounts. You may be asked to cut up your card and return it by mail. In any event, you should instruct the card issuer in writing to enter into your credit report "Closed at request of cardholder." That way, the mortgage lender will have no reason to suspect that a credit problem caused the account to be closed.
Solidify your savings
Lenders will ask for back copies of your bank accounts to see that you have
enough cash for that 5 percent or 10 percent down payment. If a relative is
giving you some or all of that money, make the deposit at least six months before
you apply for a loan. That way, the lender won't ask why and from where the
cash suddenly appeared.
By Robert K. Heady, Tribune Media Services syndicated columnist