Factors to Consider for a Smart Mortgage Journey

Thinking of applying for a mortgage? Understanding how various factors play into the application process can make it easier to be approved. Applying for a mortgage can be different from other types of loan applications, especially in what’s required to be approved for a loan.

Before applying for your loan, you can contact your lender to ask about their requirements and standards. Learning about your lender’s mortgage requirements can give you a better idea of what’s expected and allow you to set attainable goals.

Arkansas Federal Mortgage offers a variety of mortgage options. Contact us today to learn more about our mortgage options and how they may be able to help you purchase your home.

Tips For Getting Approved For a Mortgage

There are a few things that you can do to help your chances of getting approved for a mortgage:

• Check your credit report for discrepancies before applying
• Fix any credit issues
• Establish a good credit history
• Improve your credit score with on-time payments
• Reduce your debt-to-income ratio before applying by paying down your debts
• Increase credit limits on your credit cards to lower your credit utilization ratio
• Keep your credit utilization low
• Submit a substantial downpayment
• Don’t make major life changes or expensive purchases with credit

Keep reading to go more in depth about how these factors might affect your ability to get approved for a mortgage.

Credit Score

Lenders can choose what credit score they require for mortgage applications, so credit score standards can vary. Typically, lenders will look for credit scores that are above 620.

A lower credit score won’t necessarily disqualify you from a home loan, but a higher credit score is generally more likely to help you get approved. Contact your lender to find out their specific requirements for a minimum credit score before you apply so you know if they are a lender you can work with.

Federally backed mortgages, like VA loans or USDA loans, have credit score requirements that differ from other lenders’ mortgages. Home loans like these that are backed by the federal government usually have lower credit score requirements than mortgages from private lenders.

If your credit score is lower than 620, it may be a good idea to try to improve it and wait to apply for a mortgage. Making consistent, on-time payments for any debts you have and reducing your revolving credit balance can help improve your credit score quickly.

Credit History

While your credit score is a numerical value that summarizes your creditworthiness to potential lenders, your credit history is a more detailed record of your credit accounts and activity over time. Your credit score is partially based on your credit history, and credit history is another major factor lenders consider when you apply for a mortgage.

For this reason, having a limited credit history could be an issue if you’re applying for a mortgage. A lack of credit history gives lenders a limited view of your borrowing and repayment behavior – in other words, how likely you are to manage the loan responsibly.

Getting a mortgage with a limited or poor credit history is possible, but may be more expensive. You could be required to pay a larger down payment, get private mortgage insurance, or have a higher interest rate.

Improving your credit history could give you more options and lower loan rates on your mortgage application. It may take time to improve your credit history, but it could enhance your ability to get a mortgage and make it more affordable.

It’s a good idea to check your credit history before applying for a mortgage so you can go into the process with a better understanding of where your credit stands. You can get three free copies of your credit report each year by requesting your credit report from one of the main credit reporting bureaus. 

Debt-to-Income Ratio

Your debt-to-income ratio is a measure of your monthly debt payments – think credit cards, car payments, and student loans – compared to your gross monthly income. Lenders will look at your debt-to-income ratio to determine if you can afford monthly payments on the loan you’re applying for.

Lenders use a debt-to-income ratio to determine if you can afford monthly payments on the loan you’re applying for. If your current monthly debts are close to your monthly income, lenders may be concerned about whether you can afford a mortgage payment.

Annual Income

On a mortgage application, you must show that you have income that will comfortably allow you to make mortgage payments. Your lender will view your tax return information for past years and your recent pay stubs.

Before you start seriously shopping for homes, figure out what you can afford relative to your annual income. This will help you budget realistically and make sure there aren’t any surprises when you apply for your mortgage.

Employment History

Your employment history is another factor lenders will look at when reviewing your mortgage application. Lenders like to see mortgage applications with stable employment and income records, but changing jobs or recently starting a new job doesn’t mean that you won’t be approved. 

Your lender is entitled to request employment verification from your employer as part of your mortgage application. A mortgage lender isn’t required to verify your employment, but they can contact your employer to verify your employment.

Down Payment

Depending on what type of mortgage you’re applying for, the size of the required down payment can vary. Conventional loans typically call for a minimum down payment of 3% of the home’s purchase price, although the down payment can go up to 20%. FHA loans require smaller down payments, while VA loans and USDA loans have options for 100% financing and no down payment at all.

The size of your down payment can affect how your mortgage application will be received, but it largely depends on what kind of mortgage you’re applying for. It’s best to talk with your lender to get a good idea of what’s expected with the specific type of loan you’ll be seeking.

New Debt Before Application is Approved

Opening a new line of credit or increasing your debt with things like large purchases could also affect how your mortgage application is received. When you open a new line of credit, the required hard inquiries can cause your credit score to temporarily lower – and when you’re applying for a mortgage, you want your credit score to be as high as possible.

When you apply for a mortgage, Arkansas Federal will run a hard credit pull to ensure you’re in a good spot to repay the loan. We only need to do this once, but if you apply for new credit – like a credit card or auto loan – during the mortgage process, it could prompt us to conduct another credit check. Multiple credit checks can cause a dip in your score, meaning the next time we pull your credit, it might be lower than the first.

Bottom line? If you’re planning on applying for a mortgage, try to avoid taking on any new debt until after the process is complete.

Cash Deposits

Sizeable, unexplained cash deposits into your bank account will usually require some explaining. Your lender may be concerned that the unexplained deposit is a gift you’ll need to repay or an unreported loan from a family member or friend.

If you have a friend or family member help you with a downpayment, a lender may require additional paperwork specifying that the money is not a loan, but a gift.

What To Do If Your Mortgage Is Denied

If your mortgage application is denied, it doesn’t mean that you won’t be able to get a mortgage. There will still be options available to you.

If you’re denied a mortgage, you should talk to your lender. Your lender may be able to explain why your mortgage application was rejected. If the issue on your application was your credit score, they should be specific and pinpoint issues you can fix or work on.

Apply For a Mortgage With Arkansas Federal

Arkansas Federal offers a variety of mortgage options with competitive rates and no application fee. 

You can quickly and easily apply for a mortgage online today or talk to a financial expert at one of our local branch offices.