How to Prepare For a Sleek Mortgage Loan Approval
Preparing before submitting a mortgage loan application is one of the best things that homebuyers can do to ensure a slick home loan process. I have seen too many frantic clients over the years that could have liked a much less stressfull home purchase if they would have done a few things to prepare themselves before buying a home.
I would always suggest to anyone that’s looking at purchasing a home to get a credit report run right away. Once you receive the report, identify any derogatory information. Then you should begin to correct these items. There are some tremendous credit repair companies doing business today that can help clean up all of the negative marks on one’s credit report.
A few isolated late payments are typically fine, but if your report contains several late payments, collection accounts, charge-offs or liens against you, then you will need to take act. If your report is below the minimum standards of most lenders, then you must spend time cleaning up your credit file before attempting to purchase a property.
You will also want to be sure that your credit profile is free of as much debt as possible. This can help greatly with qualifying for your fresh loan. But there’s a balance that needsto be struck. Being as lean as possible on debt is significant, but having a bolstered cash position is also significant when buying a home, because lenders like to see cash reserves. I counsel clients fairly often about what combination of debt and liquid assets will work best for them to qualify for their fresh loan.
Another area that seems to be a source of frustration has to do with documenting one’s down payment. Some buyers say, “Ah, we’ll have the money together somehow by the time the escrow closes.” Every time I hear that, I cringe. That won’t cut it with the lenders. In order for the loan to be approved, the lender will need to know exactly where the down payment is coming from.
You may ask, “Why?” A critical factor in the approval process is for the lender to be able to make a determination as to the motivation level of the borrower to repay the debt. For example, if a homebuyer puts $50,000 of their hard earned savings down, that’s taken them 20 years to accumulate, there will be a strong motivation by that buyer not to let that home ever go into foreclosure, and possibly lose their $50,000. On the other arm, if a homebuyer is putting down $7,000 on a home and it was a cash advance on a credit card, there could be a tremendous difference in that person’s treatment to preserve that investment.
So it’s significant to have your down payment money well documented. The cleanest, easiest way is to be able to produce bank, or investment account statements that will demonstrate that the funds have been in your account for at least three months. Any large increases in your account balances within the past three months will cause the lender to inquire deeper about the source of that deposit. If gifted funds are involved, a bounty letter must be given to your prospective lender. Your bounty donor must be ready to verify that they have the capability to give the amount being shown. Thus, they need to be ready to display bank statements as well. And, the funds should not be given to the buyer until after the escrow opens.
There are many variations on where down payment monies come from. But whatever the source, I always like to counsel my clients on how to document their situation. Do not discard any paperwork that has anything to do with your down payment, whether it’s deposit slips, copies of checks, bills of sale…that will help to ensure a slick closing.