If you're trying to buy a house, there is nothing worse than finding your dream home only to be turned down for a mortgage.
But that won't happen if you do your mortgage shopping the right way.
"You should be working with somebody who picks up the phone and says, 'We have this problem, and let's see what the solutions are,'" says Sylvia Gutierrez, a mortgage professional in Miami and the author of "Mortgage Matters: Demystifying the Loan Approval Maze."
The right mortgage professional, whether it is a bank loan officer or a mortgage broker, will evaluate your credit profile before you ever reach the application process, help you solve problems and steer you to appropriate loan products. You could qualify for one mortgage program but fail to meet the requirements for another.
That's important, because if you apply for a mortgage and are declined, it may hurt your credit score. Plus, the form you receive from the lender declining your application won't tell you why your application was rejected.
"The form we send out to a borrower who's turned down tells you nothing," says Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage" and a mortgage professional in the San Francisco Bay Area. That makes it important to work with an actual human loan officer who can answer questions. "There isn't anybody else who can tell you why you're been declined," he says. "The underwriter's not going to talk to you. Nobody's going to talk to you."
Filling out an online mortgage application without first talking to a loan officer is nearly always a mistake. That lender may not even offer loans that suit your situation.
When you apply for a loan, lenders look at three major issues: your credit, income and assets. Any one of those factors could hurt your chances, though Fleming says credit issues, including having too much debt, are the most common roadblock.
Since the mortgage crisis, lenders have become much more careful about verifying income sources. That makes it especially important for freelancers and contract workers to deal with a loan professional who knows how to make their applications attractive to lenders by providing the correct documentation.
If you've decided to buy a home, you should find a good loan officer and get a mortgage prequalification before you ever look at houses. If there are any problems, such as errors on your credit reports, collections or income that won't be counted, you want to be aware of that before you find your dream house.
"Fixes are very rarely quick," Fleming says. "They're usually something you have to do over months."
Here are seven things to do to avoid being turned down for a mortgage:
Get your credit reports early. You want to look at your reports from all three major credit bureaus (Equifax, TransUnion and Experian) to make sure there are no errors. If you've got collection accounts or a few late payments, ask the creditor to remove those, Fleming suggests. If your credit score is low, meet with a mortgage broker or credit counselor and ask for suggestions to improve it.
Know what income a lender will count. Lenders like to see a two-year track record in your job, though a new job in the same field probably won't be counted against you. A lender may be happy to work with you even if you're in a first job in a field you studied in college. But if you've just switched from dentistry to business management, a lender may not be willing to count your income until you show two years of earnings.
If you're a freelancer, plan way ahead. If you're self-employed or own a business, a lender will want to see two or three years of tax returns, to start. If you take a lot of deductions to cut your taxable income, know that a lender will consider only your net income, not your gross income. If you work on contract, you may need to provide verification from the employer that the contract is going to continue. "Freelancers are tough," Fleming says. "If you're independent … you'd better have income on your tax returns, or you're not going to get anywhere."
Pay off any debt you can before you apply. When deciding whether to grant a loan, a lender will consider all your debt, including student loan debt, credit card debt and car loans. If the debt-to-income ratio is too high, you won't get a loan. For most mortgages, the debt-to-income ratio for all debt can't be higher than 43 percent.
Be able to source any funds you play to use. The lender will want to know where you got your down payment. If it's a gift or a loan from family, you will need to specify which and document that the family member has the money and can afford to give it to you. If your parents give you money, for example, they will need to show bank statements and provide a gift letter.
Find a good mortgage broker or loan officer. All brokers and loan officers are not alike. Get recommendations from real estate agents, friends, colleagues and professional contacts. Ideally, you'll interview several loan officers and then choose the best. A good mortgage broker is going to shop your loan among multiple lenders to find the best deal for you. The expertise comes in when the broker evaluates your situation and then puts the package together to submit to lenders. "It's very important for the borrower to have these conversations with the lender," Gutierrez says. "There are a lot of technicalities that could mess it up along the way."
Do not apply for a loan until you talk to an actual person. Many of the online sites that say they offer loans really are lead generation sites that sell your information to mortgage brokers. Your best option is to find a local mortgage broker that comes recommended. But if you choose to work with an online lender, make sure you have a specific loan officer you can talk to by phone assigned to your case for the duration of the process. This is not something that can be automated.