The question of what it takes to qualify for the best terms and interest rate on a mortgage comes up quite often in my discussions with potential home buyers. There are three factors lenders consider and you should consider too if you want the best possible terms for mortgage financing: Credit, Capacity and Collateral.
Credit: The best credit takes years of past payment history with on time payments and very few changes. Obviouslly if you are looking to buy a home in the near future you do not have years to work on your credit and still want to do everything possible to increase your score. This topic is huge and could not be covered in this post, today. Here are some quick tips. Pay everything on time for as long as you can. Keep accounts open as long as you can. Keep the balances compared to the limits as low as you can. If you do those three things related to credit, you should have a pretty darn good score.
Capacity: How prepared are you for a mortgage payment you are looking to obtain? Do you have adequate income to qualify for the payment? Do you have the type of income that can be used by a mortgage lender? Mortgage lenders love a minimum of a two year history of employment. If you have two years on any job with the same type of income (salary, hourly, OT, bonus, commission, self-employed, etc) over those to years, you will be set to document the income you earn. For the buyer who has self-employment income or an income source that allows for you to write off expenses before paying taxes, consider that the mortgage lender can only count the income that you pay taxes on, not the full amount. That also means that if you receive cash tips and do not report those tips to the IRS, the mortgage lender will not be able to use that income for qualifying.
Collateral: You don’t have a lot you can do to increase how the lender looks at the collateral, or the home you are financing. All I can say, is that you should find the house that works for you, is in good shape and can be resold at a later date when you decide you would like to move on. Sometimes people find a home that is very unique or difficult to finance (manufactured homes can be difficult to finance and therefore difficult to sell). Consider the home you buy will need to be sold and financed by the buyer.
This doesn’t cover everything you would need to do to prepare to get the best home loan possible, but these items will put you in a better position than most.