To qualify for a great mortgage rate, you want to show lenders that you’ve been consistently earning money and that your income has remained stable or has been rising. If those things are true, submit IRS annual and quarterly estimated income-tax returns over the past several years. In particular, be sure to submit Schedule C, “Profit or Loss from Business” which can show that you have a profitable business.
If you work for someone else, or you are or have been employed by a company but have had a recent gap in your employment history, submit several years of tax returns. That can make a lender more confident about your creditworthiness.
Your FICO Score Is Below 760
The FICO credit score is the most common one used by lenders; the best mortgage rate and terms go to borrowers with a minimum FICO score of 760. Get a free copy of your score to see where you stand. Also, check your credit reports from the three major credit-reporting agencies—Equifax, Experian, and TransUnion for errors; you’re entitled to one free report from each company per year.
Once you’ve gotten your reports, you can take steps to improve your score. First, look for errors, such as accounts that aren’t yours or black marks caused by identity theft, and dispute them. That should raise your credit score quickly. Then focus on paying down debt, especially any debts that have been turned over to collectors.
Keep in mind that the new FICO 9 score won’t hurt your rating if debt in collections has been paid. Also, be sure to pay your bills on time going forward. Just a couple of late payments can negatively affect your credit score for one year or more.
You Have Too Much Debt
Lenders want your mortgage payment to be 28 percent of your monthly gross income. All household debt—mortgage, property taxes, private mortgage insurance, and home insurance—shouldn’t be more than 36 percent of your gross income.
If yours is higher, you can get a better mortgage rate by applying for a smaller loan. Focus, too, on paying off that other debt and, if possible, take steps to increase your income.
Be sure to pay off credit-card balances every month so that your debt levels don’t rise further, and don’t take on new loans or open new credit card accounts. If you do, the credit card issuer will do an inquiry into your credit history, and that can hurt your score.
You Can’t Afford to Put 20 Percent Down
It’s possible to get a loan with as little as 3 percent down, but you’ll have to pay for private mortgage insurance which protects lenders if you can’t make your payment.
A better option is to find ways to put the most money down that you can—up to 20 percent. One way to do this is to look into programs that provide loans or outright grants to fund down payments. You can search to see what programs you may be eligible for at downpaymentresource.com.
While saving more may not be an option, consider selling assets (such as a car) to help you put more down. If you’re a first-time homebuyer you can also borrow up to $10,000 from your IRA without triggering the 10-percent IRS early-withdrawal penalty.
Another option could be to turn to family members. A relative can give you up to $15,000 each year without facing any federal gift tax. So your parents could give you $30,000 total.
You’ve already been denied by one or two lenders. Most lenders typically use the same basic standards to approve you for a mortgage, but if you have been rejected or offered rates higher than you’d hoped for, find out why and do what you can to fix the problem.
The first step is to ask lenders why they are giving you a less than adequate rate to see if you can address the problem. While searching for a better rate, include banks, credit unions, and savings and loan associations. Also, consider turning to a certified mortgage broker to help you get a better rate. You can find one through the National Association of Mortgage Brokers.