How to Ensure Your Mortgage Will Be Approved

In these days of ever-watchful lenders, you, as a consumer, can put yourself in the best possible position to be approved for a mortgage by taking a few simple common-sense steps before you start your home search.

The first step is ensuring you are paying your bills on time. As simple as this sounds, lenders find it extremely important to know that you’re capable of paying on your current debt before they permit you to saddle yourself with even more debt–perhaps more than you can handle.

Second, if you aren’t doing so already, control the amount of your current debt, particularly revolving debt such as credit card balances. Pay special attention to the ratio of your balance to your limit and try to keep this below 30%.

For example, if you have a credit card with a $500 limit, try to keep the balance under $150. If the ratio goes too high, even on lower-limit cards, it looks to the credit bureaus as though you are about to reach the full limit of the card, which tends to drive down your credit score.

Having multiple cards that are at or close to their limits may start impacting the number of mortgage programs as well as the dollar amount you are able to qualify for.

It’s always a good idea to either pull your own credit, which you should be regularly doing anyway, or ask your mortgage professional to pull it.

If it turns out that there are unexpected items on your credit report that need to be addressed and/or removed, this action will give you the opportunity to take these steps before starting the approval process.

But don’t leave it too long; you can expect that any type of action to correct a credit report will take a minimum of 30 days to affect your report.

Should I Pay Off My Mortgage or Save for My Child’s Education?

The answer to this question will be different for everyone. It will be based on your personal situation and financial goals. Once you define and prioritize your goals, you can develop the plan that works best for you.

If you come into some extra cash from an inheritance or a bonus from work, you may be narrowing the choices to spending it on paying off your mortgage or directing it to your child’s education. Investing in a 529 college savings plan allows you to contribute to the savings account and withdraw funds tax-free to pay for college tuition and other educational expenses.

Deciding on the college expenses choice will be dependent on your child’s age. Paying off your mortgage will be the better option if your child is elementary school-age or younger. You can still open a 529 savings plan and gradually grow it over the next several years until college age comes.

Evaluate your home’s equity. If you have less than 20% equity in your home, then paying down your mortgage is a good choice. Doing so will help you get closer to eliminating private mortgage insurance.

If your mortgage interest rate is higher than 3%, you should favor paying off your mortgage. Typically, 529 plans do not pay a very high interest rate, so paying off your home would be a wiser move.

The desired liquidity of your assets and tax benefits will also contribute to your decision-making. Call me, and I can help you decide which option best fits your personal financial situation.