Get Approved For Your First Mortgage

Despite the recent financial crisis, your prospects of being approved for your first mortgage are still very bright. However, you do need to be smart, and prepare ahead of time. Doing your homework saves you plenty of time, money and disappointment. This is true regardless of whether you are applying for a pre-approved mortgage, a bad credit mortgage, a home equity mortgage, or any kind of mortgage at all.

Not too long ago, anybody with a job could get first mortgage loans. But ever since the recent financial crisis, banks have drastically tightened their lending policies. Today, it takes good credit with the right income and references to get a home mortgage. But it can be done, by paying attention to three key areas.

Here are the items you need to examine:

• Your credit report
• Your monthly income and expenses
• Your down payment and housing budget

Credit Report

Before applying for any mortgages, first request a report of your credit history. There are many ways to obtain a free credit report. Federal law gives you the right to a free copy of your credit report once a year at annualcreditreport.com. You should closely examine your report and check it for errors.

For the best chance of a successful mortgage approval, your estimated FICO score should be 700 or above. Anything less than 675 means that you need to find a co-signer with excellent credit, or else take the time to build your credit score up to 700.

Income And Expenses

Your next step is to document your monthly income and expenses, which is information that will be required by the very first mortgage company that you approach. To help you figure out your monthly expenditures, try a simple free budgeting tool like mint.com or BillQ.

Here is a list of the documentation you will need to provide. Depending on the lender, additional information might be required

• social security numbers for each applicant
• copies of checking and savings account statements for the past 6 months
• documentation of other assets, like stocks or bonds (if any)
• two recent paycheck stubs with earning details
• a list of account numbers and balances due on any loans, such as car loans
• a list of all credit card accounts and the amounts owed on each
• contact details for someone who can verify your employment
• copies of your last two years of federal income tax returns

Keep in mind that any large loans that you already have, such as auto loans, second mortgages, or credit card advances, will hurt your chances of being approved for your mortgage. Pay these loans off if possible, or at least try to reduce the balances. Also, do not take out any new loans in the period while you are waiting for your mortgage application to be approved, as the lender will double-check your credit report for new debt before granting final approval.

Housing Budget

You absolutely need to determine the maximum payment you can afford each month, before you apply for your first mortgage. A good rule of thumb is to figure that your total mortgage payment, including insurance and taxes, should represent no more than 35% of your gross income (before taxes). For example, a salary of $50,000 per year works out to a maximum monthly mortgage payment of $1,458. Some good mortgage calculators are available from Ginnie Mae.

Unfortunately, it’s not easy to translate this monthly payment into a pre-determined house price, because your payment includes variables such as condo fees or house insurance, which can differ greatly between properties. Sometimes, the variable costs can exceed the actual cost of the mortgage itself. Most people pay their mortgages first, then pay their other household expenses.

One thing that will help reduce your monthly mortgage payment is to provide a large down payment. If you put less than 20% down when you buy the house, your lender will require you to purchase private mortgage insurance (PMI). PMI protects only the lender, and it greatly increases the cost of first mortgage loans. You should therefore seriously consider delaying your house purchase until you have saved enough money to provide a 20% down payment.

Be Realistic

It is essential to understand, realistically, how much you can actually afford to pay each month. Sometimes real estate agents, or your own desires, might entice you into a mortgage that is too expensive for your budget.

Which would you rather have: a smaller first home mortgage that you are comfortable paying off, or a larger house that you lose to foreclosure if things turn bad?