Once you make the decision to buy a home, the real work begins. The loan mortgage process can take time, especially if you’re not prepared to hand over all of the documentation the lender requires. In February 2021, the average time to close on a mortgage was 53 days, according to Ellie Mae. But having all your ducks in a row before you begin can reduce that time to as little as 30 days with the right lender.
Preparing ahead of time is key to avoiding obstacles once you’ve found your dream home. Let's discuss things you can do now, before you even begin to look at houses, to help speed up the home loan application process.
Make sure your credit history is accurate.
Your credit history has an important role to play in determining your credit score, which will determine whether your application will be approved and what rates you’ll be eligible for. For that reason, it’s wise to begin by checking your credit report to ensure there are no unwelcome surprises.
Keep in mind it’s not all about whether you’ve been making your payments on time. It’s also about making sure no one has latched onto your good name and done bad things to your credit.
During the pandemic and subsequent shutdowns in 2020, fraud and identity theft attempts increased nearly 23% percent, according to TechRepublic. Mistakes or fraud on your credit report can take time to correct, so you don’t want to learn you’ve been a victim of identity theft after you’ve already applied for a mortgage loan.
You can visit AnnualCreditReport.com to get your free credit report from all three credit reporting agencies: Experian, TransUnion and Equifax. This will give you an opportunity to investigate potential problems, remove outdated information and search for signs of issues that could derail your mortgage application. The sooner you start this ball rolling, the faster you can move forward in the mortgage loan process.
What constitutes good credit for a mortgage loan?
Most lenders require a minimum FICO score of 620 for a conventional home loan. It’s possible to get a Federal Housing Administration (FHA) loan with a credit score as low as 580, but that isn’t necessarily where you want your score to be when buying a home. In fact, to get the best mortgage interest rates, your credit score needs to be substantially higher.
Typically, lenders reserve the lowest mortgage interest rates for borrowers who have credit scores between 760 and 850. Lenders have tiered interest rate plans they work with for mortgage loans. Although each lender has its own tiers and credit score qualifications, an average tier plan for fixed mortgage interest rates on a 30-year loan may look something like the table in Figure 1.
Although there doesn’t appear to be much variation between these interest rates, the difference you’ll pay each month over 30 years based on your credit score can really add up. For example, if you financed $320,000 of the price of your home at an interest rate of 4.656% versus 3.057%, you would pay $105,192 more in interest over the life of the loan. So having the best possible credit score when you apply for a mortgage loan makes a big difference.
Raise funds for your down payment.
Some first-time homebuyer loan programs allow you to buy a home with as little as 5% of the sale price as a down payment. There are even zero-down mortgages for those who qualify (although, you would still need to plan for closing costs). While you may be able to get into a home quicker by taking advantage of a specialized loan, there are trade-offs you should be aware of before deciding on this option.
For starters, you may have to jump through a few additional hoops and be prepared for the loan application and approval process to take a little more time. Another tradeoff to consider is that lenders may charge higher interest rates or have different qualifying criteria for these specialized loans.
In addition, if you don’t put 20% down on a conventional loan for the home you want to buy, your lender may require you to pay private mortgage insurance (PMI). This can add anywhere from 0.55% to 2.25% of the original loan amount per year to your monthly payment until you reach at least 20% equity in your home. Lenders are likely to require PMI because, with a lower down payment, your loan is considered a higher risk, and PMI provides some protection for the lender in case of a default.
While the added costs are a drawback, that doesn’t mean you shouldn’t consider one of these loan options. For example, making your home purchase at a time when you can lock in a low rate could still result in a net savings over the life of the loan versus waiting until you have a 20% down payment but have to pay a higher interest rate.
Saving up for a 20% down payment and closing expenses can take time. However, it’s your best bet to avoid added costs. Ultimately, you’ll have to assess your individual situation to decide whether the added expenses are worth it to start building equity sooner.
Reduce your debt-to-income ratio.
In the days and weeks before applying for a mortgage, it’s a good idea to make sure you have your debt under control. This may mean paying off smaller debts, if possible, so that your debt-to-income (DTI) ratio is more attractive to lenders.
You can calculate your DTI by dividing your total monthly debt payments by your gross monthly income. Most lenders want to see a DTI ratio below 36% after your mortgage. This shows them you’ll be able to not only make your mortgage payments, but also handle other expenses that arise while maintaining your home.
Ideally, your mortgage won't be so large that it requires the bulk of your monthly income to pay it. Reducing your DTI going into the mortgage process shows lenders you’re responsible with borrowed money and instills confidence that can result in a swifter approval.
Gather your paperwork.
While you’re working to make sure you have the best possible credit and funds for a down payment, it’s also a good time to start collecting the documents you'll need in order to apply for your mortgage. Having these items ready will expedite the application process.
The documents you’re most likely to need when applying for a home loan include:
- Driver’s license or valid government-issued ID — This an important tool to verify your identity and confirm your address of record. Make sure your address is up to date and that your ID won’t expire before the loan closes.
- Social Security card — Your Social Security number is used by lenders to check your credit history and credit score. To verify your information and prevent fraud, lenders may also ask to see your physical Social Security card.
- Employment pay stubs — These help lenders understand your income, including its frequency and reliability. Be sure to gather pay stubs covering the most recent 60-day period.
- Recent bank statements — These provide yet another method to verify your identity and show lenders how you spend (and save) your money. This proof can help tip the scales in your favor by showing positive financial habits. However, it can have the opposite effect as well.
- Tax returns — Most mortgage lenders prefer your two most recent years’ worth of tax returns. This should include copies of W-2 forms or 1099 forms, if applicable, to show proof of income.
- Proof of assets — Lenders like to see that you have an alternative means to cover your monthly payments in case of a financial emergency or loss of income. You’ll want to gather the most recent two months’ worth of statements for your checking and savings accounts as well as any investment, retirement or brokerage accounts you may have.
- Proof of homeowners insurance — Before you can close on a new home, you will need to show proof of homeowners insurance on that home. The exact scope of coverage may vary from lender to lender, but most require that your home be insured for 100% of its replacement cost.
- Existing or previous mortgage statement — This provides verification of current mortgage payments if you already own a home and helps establish your debt-to-income (DTI) ratio, which many lenders weigh heavily when making lending decisions.
- Monthly debt payments — Likewise, lenders may want to review or verify your monthly debt payments and balances when calculating your DTI ratio. Gather statements for loans, credit cards and other debts. Statements should include account numbers, monthly minimum payments, balances and creditors’ contact information.
- Property tax bills — This is another item used to determine your DTI ratio if you currently own property.
You may be asked to provide other information along the way. But having this list of documents prepared when applying for a mortgage will save you time, energy and headaches — and streamline your mortgage approval timeline.
The key thing to remember, should your lender request additional information or documentation, is to give it to them as soon as possible. If you haven’t heard from your loan officer, reach out to them to verify they have everything they need. When you communicate proactively and comply quickly with requests, the entire process goes faster and more smoothly.
Avoid significant life changes.
Life changes are inevitable, but they should be put on hold as much as possible as you prepare to purchase a home. Specifically, you should avoid changes that could have a financial impact and lead lenders to decide against approving your mortgage. Things you should especially avoid during this critical time include:
- Changing jobs, quitting or being fired
- Applying for credit (furniture and appliance purchases, new car loans, etc.)
- Missing a payment on a credit account
- Bouncing checks
- Getting a new credit card
- Making a large deposit to or withdrawal from your bank accounts
These are all examples changes that could potentially affect your income, FICO score, credit history or DTI. Keep in mind you need to continue to avoid these types of major life changes until you’ve closed on your home. Your lender may run a final credit check just prior to closing to ensure you’re still in good standing to make your monthly payments.
At best, a big change may slow down your mortgage approval or require you to submit additional documentation if lenders have to reassess whether you still meet their lending requirements. At worst, your loan could be denied.
Apply for mortgage preapproval.
Preapproval is different from mortgage prequalification. Preapproval involves a more in-depth verification process in which lenders typically provide a conditional commitment to let you borrow a specified amount for your home purchase. It also indicates what kind of interest rate you can expect to pay on your mortgage.
The added benefit of a mortgage preapproval is that it gives you an advantage with home sellers. In a seller’s market, preapproval letters are looked on more favorably than letters of prequalification for a mortgage because it means the lender has taken a more comprehensive look at your finances and the loan approval is less likely to fall through.
More importantly, getting your mortgage loan preapproved will give you peace of mind that, once you find your dream home, your less likely to face any unexpected delays in the loan approval process. That’s a huge weight off your shoulders — especially in tight real estate markets like Washington state, where the best properties are bought as soon as they’re listed on the market.
You may want to apply for preapproval with multiple lenders to see which offers the best deal. Be sure to pay attention to the annual percentage rate (APR), which will provide the best basis for rate comparison because it also takes lender fees and other expenses into account.
While a hard credit pull may affect your credit score, you can minimize the impact by submitting your loan applications within a short time frame, as the credit agencies recognize that buyers like to shop rates. And, when you have multiple lenders competing for your business, you can choose the offer that works best for your needs.
Stay in touch with your lender.
Mortgage lenders work with multiple borrowers and applicants at once. Whereas you only have one home mortgage to worry about, they may be working with thousands.
If you don’t stay in contact with your lender and up to date on the mortgage process, your loan application may fall through the cracks. Call or email your lender if you don’t get a response once you’ve submitted any requested documentation. Be proactive and ask what you need to do next.
Remember, the squeaky wheel gets the grease. If you want to speed up the approval process for your mortgage application, you may need to be the squeaky wheel the lender is eager to accommodate and approve so it can move forward with other clients.
Although there are no guarantees when it comes to mortgages, being prepared ahead of time is the best way get your home financing approval faster.
Start your mortgage loan process.
At WSECU, we’ll answer any questions you have and help you find the loan that will work best for you.