Home loan lenders have a saying: Follow the Golden Rules and get the gold.
Here are three Golden Rules of mortgage lending. When you know your lender’s rules, you can be prepared with the right data at the right time, paving the way for a smooth application approval.
The Rule: Score With Your Credit
How have you used credit in the past? Are you always catching up on your bills? Hitting your credit limit?
Your credit history is one of the most critical factors in winning a loan.
Every lender will examine your credit scores – single numbers that summarize your credit history.
Three national agencies — TransUnion, Equifax, and Experian – produce the scores. Typically, lenders pull them into a combined report.
The report does not merge your scores. Instead, the highest score and the lowest score are tossed-out, and the remaining score – the median – is what the lender will use.
Don’t get surprised by your credit scores. Take a look at what the lender is going to see.
Your credit reports also include your employment history, income history and assets. All of these factors also count towards your loan applications – for better or worse.
The Rule: Collateral Counts
Your new house is collateral for the mortgage. Regulations vary by state, but it’s save to assume that if you can’t pay your mortgage, the lender gets the house.
Naturally, lenders want to know what they might end up with, if the worst-case scenario becomes a reality.
That is why lenders order independent appraisals. The appraiser looks closely at the location and condition of the house you want to buy, and will evaluate comparable properties that have sold nearby within the last six months. That’s a tall order when few houses are selling, pricing trends are erratic – as has been the case from 2007 to now.
Provide the appraiser with documentation for the purchase price. That can include comparable sales; receipts for improvements; property tax assessments, if they are done frequently in your area; and other independent verification of the value of the house.
The Rule: Fall in Line
Chances are, your lender will not keep your loan. The lender will sell the loan to one of the major finance companies that comprise the secondary mortgage market. You’ve probably heard of them by their odd acronyms: Fannie Mae and Freddie Mac.
Together, these two companies keep money flowing through the home loan system by buying quantities of mortgages. Buying in bulk requires streamlining, and streamlining means standardizing, and that means that your loan will probably have to comply with Fannie or Freddie rules.
Typically, Fannie and Freddie automate all this with sophisticated mathematical formulas that analyze the sturdiness of each loan. People see your loan too: underwriters look at the documentation that proves your ability to pay back the loan and try to sniff out fraud or exaggeration.
Gather your paperwork well in advance of applying for the loan. If anything is out of the ordinary – you inherited the down payment, your income fluctuates, you work for a start-up company – be prepared with additional documentation that can ease the underwriter’s mind.
Applying for a mortgage takes time, mastery of paperwork, and patience. It’s a good idea to get ahead of these rules, and find out what rules are customary for lenders in your area, before you’re actually trying to buy a house. Preapproval clears the way for a clean, authoritative offer and improves your chances of an uncomplicated closing.
PrimeLending is a nationwide mortgage bank founded in 1986 with offices in 49 states. Our Vision at PrimeLending is to provide unsurpassed quality service and support throughout the entire mortgage process for every client. Our proactive sales and operational philosophy simplifies and accelerates the loan process at all levels. The company’s experienced mortgage professionals are dedicated to making every customer’s home loan experience a positive and successful one.