Will You Qualify for that New Mortgage or Re-Finance?
The Federal Reserve continues to raise short-term interest rates, but long-term mortgage rates are still at 40-year lows. This may be one of your last opportunities to lock in great interest rates below 6%. So, we put together a brief checklist for you to follow in order to make sure that the process goes smoothly for you.
First, it is a good idea to check your credit report to make sure there will be no surprises when your lender takes a look at it. You can get a free copy of your credit report and credit score at http://www.trimyourdebt.com/GetYourCreditScore.aspx. Remember a score above 700 usually means you will get the best interest rates. Usually a rate below 680 is considered to be of higher risk and so the lender requires a higher interest rate to mitigate the increased risk of loss.
If you find any incorrect information in your credit report, be sure to get it cleaned up before applying. Cleaning up negative items from your credit will also ensure that you get a better credit score. For information on how to get your credit cleaned up before you get that new mortgage, visit http://www.trimyourdebt.com/CreditRepairGuide.aspx.
Next, list out all of the debts reported on your credit report and add up all of the monthly payments. Also include what your payment would be with your new mortgage. In order to estimate your monthly payment with a mortgage interest rate of 6%, you can use $6 per thousand dollars of mortgage. So for example, if you need a $150,000 mortgage, then multiply 6 times 150, which equals $900 per month. Add this payment to the other monthly debts listed on your credit report and this will be your total debts.
Now take out your most recent paycheck stubs to do a debt-to-income calculation. The calculation is done by taking the total debts from above and dividing this number by your gross monthly income. The ratio should be less than 38%. If your ratio is too high, then you need to do your best to start paying down your debts. The quickest way to do this is to follow the debt plan that is available at http://www.trimyourdebt.com/welcome_budget_short.aspx.
The final item that you will need to provide to your lender is documentation that shows your assets such as bank account statements, 401(k) statements, any cash value of life insurance, etc. Your lender wants to see where your down payment will be coming from.
Don Blackhurst is the co-founder of TrimYourDebt.com (http://www.TrimYourDebt.com), which provides free budgeting tools, debt planning, and credit help. He has been working in the banking and finance industries for over 15 years and has an MBA with an emphasis in Finance and Econometrics.