What You Need to Get Approved for a Mortgage

There’s no question, it’s a good time to get a mortgage.

Average mortgage rates on 30-year fixed-rate loans are around or under 5%. Some forecasters predict that number will climb to 5.5% by the end of 2010 and by 5.9% in 2011, although a new Fed study suggests rates will stay low until 2012.

I know this because my wife and I are currently weighing the pros and cons of upgrading from our condo to a single family home.

Make no mistake: It’s a heavy decision.

Contrary to what many say, home ownership is not always the right move. And you shouldn’t look at a home as an investment. Often, even renting makes financial sense.

So this is my disclaimer: Don’t buy a house just because rates are low. But if you’re ready, now’s a good time to shop for a home loan.

That’s because mortgage applications are down following last-year’s home-buyer tax credits, and lenders are competitive. Still, the standards to get approved for a mortgage are high. Excluding FHA loans and some other special loan types, you’ll need:

• Great Credit. Although you may get approved for a mortgage with a score in the 600s, a score of 720 or higher will get you the best rates. (Don’t know your credit score? Get it now.)
• Money Down. Think 10%, 15%, or 20%.
• Cash On Hand. Banks want to see that buying a home isn’t going to drain your account. And it’s good form to have an emergency fund leftover after all the closing costs (and moving expenses) are paid.
• Solid Employment. The longer you’ve been at your job, the better. Self-employed mortgage applicants will have to prove their income with tax returns and, possibly, audited profit-and-loss statements.

What Do I Need to Apply for a Mortgage?

Before you apply for a mortgage (for a new home purchase or a refinance), you’ll need the following items:

• Social Security numbers and birthdates for all borrowers
• 24 month residence history
• 24 month employment history (need name, number and address of employer)
• Copies of pay stubs for last 60 days
• Copies of W-2 forms for last 2 years
• Bank statements and investment statements for last 2-3 months
• Evidence of homeowner’s insurance
• Address of the property you are purchasing or refinancing
• Purchase agreement (new home) or title documentation (refinance)
• If you are self-employed, copies of tax returns for the last two years

How to Comparison Shop for Mortgages

Start by calling one or two local banks or credit unions and asking for a good faith estimate (GFE). The banks won’t charge a full application fee for this part of the application but may charge a credit inquiry fee of between $15 and $50, so be sure to ask. For comparison, you can also get several free mortgage quotes online fairly quickly.

If you need additional help finding a suitable loan and rate, a mortgage broker may be able to help (mortgage brokers can shop your application around to dozens of banks to get the best rate). Ask friends and neighbors for referrals to a good mortgage broker.

When you compare your estimates, don’t forget to factor closing costs into the final cost of your mortgage. Banks may low-ball closing costs when providing an estimate and then slam more on you when you’re in the final throes of closing and eager to get it over with. If a lender has a lower rate but higher closing costs, go back and negotiate. Always ask!

What about you? Have you applied for a mortgage recently? Did you comparison shop? What tips would you offer others? Let us know!