Rejection hurts. It is particularly hard if you are denied for a mortgage preapproval, which is one of the biggest hurdles in the homebuying process. To avoid being denied on a mortgage preapproval, here are five steps to take before you fill out an application:
Know where you stand
Review your credit report and check your FICO score to uncover any issues and determine whether you need to build your score first. Calculate how much monthly debt you are carrying and how much you owe overall.
Move quickly to fix mistakes
Contact the credit reporting agencies immediately if you see any incorrect or false information on your reports. Mortgage companies generally want loans to close on time, so they will pay credit agencies to update your credit report quickly with a rapid rescoring service, said Joey Abdullah, a mortgage planner with Fairway Independent Mortgage Corp. in Arvada, Colo.
Tackle debt head-on
Pay all of your bills on time and, if possible, in full every month. Learn which debts to pay down first to improve your score quickly. For example, addressing delinquent collection accounts first usually has a more immediate impact on your credit score than paying down credit cards. After you pay off delinquent accounts, make sure you have some good credit to show. Show consistent income over time
Your mortgage lender will want two years’ worth of tax returns and bank statements to show consistent income deposits. If you earn most of your income from hourly wages, commissions or bonuses, or if you are self-employed, you will need to provide two years of income documentation to your lender. Expect to show your bank statements, pay stubs, tax returns and other financial paperwork. Spend less and create a budget
It is critical to control your monthly spending and avoid large purchases, such as a car, to lower your debt-to-income ratio and qualify for better interest rates. Don’t forget about those inevitable repair costs that come with homeownership. Having a budget and an emergency fund, is important for the long haul.