If someone were to say "______" is the most important thing when applying for a mortgage that wouldn't be telling the complete truth. The fact is there are many factors involved when underwriting is deciding if a loan application is approved or turned down.
There are probably three areas that are more important than others however there is no one single factor that underwriters rely on. What are the three areas? Great question!
The Three C's of Mortgage Underwriting:
Capacity: This is the borrower's ability to pay the loan. Underwriters look at your income, your debt and your total house payment (PITI - Principal, Interest, Taxes and Insurance. If you are buying a Condominium than they'll also add in your HOA dues as well).
Collateral: This is the value of the home. If the home is only worth $300,000 lenders are not going to loan you $500,000....that's so 2006! What lenders will do is loan amount that makes sense to them.
Credit: This is your credit history, number of accounts open and your credit score. This is what we'll focus on today.
Here Is What's Important:
When it comes to getting a low mortgage rate and your credit you have to remember one thing. The credit score is everything. Sure your total debt and debt payments are important but when a Loan Officer goes to figure out the quote that rate is not based on your debt or debt payments (directly) it's mostly based on your Credit score (along with the value of your home...Collateral!).
So the main thing a borrower needs to focus on to get a low mortgage rate is how high can they get their credit score before they apply for the mortgage. Stay away from the questionable scheme's some websites and advertisements push and just use common sense.
If you have a lot of debt that says one thing to the credit bureau's; you're struggling to pay your bills and you spend too much money. Don't take it personally; we've all be there but be honest with yourself and you'll have a better understanding of the mortgage process.
Once you've crossed that hurdle then the solution is simple; pay down your debt to a reasonable level. Key word is reasonable. Your reasonable level is probably different than what the credit bureau's view of reasonable.
Ideally you want your debt level to be below 50% of your credit limit level for all credit cards and furthermore you probably shouldn't have more than four or five cards with balances.
Some Inside Information:
Ok this might not be "inside information" but it is important. And if you're the person that has several credit cards that you max out every month to get miles or points or cash back but for some reason your credit score is not the best then this is for you. When you receive your bill and it shows a balance; that balance is what the credit card company reports to the credit bureaus.
Even if you pay the balance in full!
That's right. If your credit limit is $5,000 and you charged up $4,880 guess what? That's what gets reported to the bureaus and then the bureaus think you're living beyond your means and ding your credit score!
So what do you do?
Pay the balance in full BEFORE the bill cycles. So if the bill gets issued on the 28th you then want to pay the balance in full by the 25th or 26th. Then when the bill cycles on the 28th they will report a zero balance to the three major credit bureaus.
Loan Officer Kevin O’Connor
JB Mortgage Capital, Inc.
CA BRE #01499872 – NMLS #247447