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Strategies to take when applying for a mortgage

Money Management

Monthly financial advice
from the MACPA

For release: August 2007

Editor's note: The following article is provided by the California Society of CPAs. It is reprinted here with permission.

In today’s marketplace, applying for a mortgage can be stressful. But knowing what's involved in the process can make things a lot easier. Here are some strategies you need to consider when getting started.

Strategy 1: Do some homework before you apply

Think about what type of home you want, what your budget will allow, and what type of mortgage you might seek. Get a copy of your credit report, and make sure it's accurate; dispute any erroneous information to get it corrected. Be prepared to answer any questions that a lender might have of you, and be open and straightforward about your circumstances.

Strategy 2: Know what you will need to provide

When you apply for a mortgage, the lender will want a lot of information about you (and, at some point, about the house you'll buy) to determine your loan eligibility. Here's what you'll need to provide:

The name and address of your bank, your account numbers, and statements for the past three months.
Investment statements for the past three months.
Pay stubs, W-2 withholding forms, or other proof of employment and income.
Balance sheets and tax returns, if you're self-employed.
Information on consumer debt (account numbers and amounts due).
Divorce settlement papers, if applicable.

You'll sign authorizations that allow the lender to verify your income and bank accounts, and to obtain a copy of your credit report. If you've already made an offer on a house or condo, you'll need to give the lender a purchase contract and a receipt for any good-faith deposit that you might have given the seller.

Strategy 3: Know how much of a mortgage you can get before you look at properties

In many cases, you'll want to know how much mortgage you can get before you look at homes so you won't waste time drooling over places that you can't afford. Your potential lender can either pre-qualify you or pre-approve you for a mortgage.

Lenders use several standard ratios to determine how much mortgage you're eligible for. Generally, if you're applying for a conventional mortgage, your monthly housing expenses (mortgage principal and interest, real estate taxes, and homeowners insurance) should not exceed 28 percent of your gross monthly income. In addition, your total long-term debt (monthly housing expenses plus other debt payments that won't be repaid within a year) should be no more than 36 percent of your gross monthly income. Government mortgage programs, such as FHA and VA mortgages, have higher qualifying ratios.

Keep in mind that qualifying ratios vary among lenders, and you may still qualify for a mortgage even if you exceed the ratios listed above. For example, some lenders will allow higher ratios if you have excellent credit, a large down payment, or substantial savings, or meet other conditions.

Pre-qualifying for a mortgage is simply a matter of a lender crunching these numbers to tell you how large a mortgage you'll qualify for based on those ratios. Remember, what you qualify for may not be what you can afford. Only you can determine that after examining your own budget and lifestyle. Because the lender has not verified your income or examined your credit report, prequalification promises you nothing; it simply tells you how much mortgage you might get.

Pre-approval, however, means that the lender has checked out your income and credit. You'll get a letter of commitment stating that you'll be given a mortgage up to a certain amount. Pre-approval lets you know exactly how large a mortgage you can get. In addition, it gives you more credibility as a buyer, since a seller can see in the lender's letter that you're going to get the mortgage if he or she accepts your purchase offer.

Strategy 4: Know what is needed to finalize the application

As your mortgage application is processed and finalized, your lender is required by law to give you several documents. Within three business days of applying for the loan, the lender must inform you of the mortgage's effective rate of interest, or annual percentage rate (APR). If relevant, the lender must also give you consumer information on adjustable rate mortgages. In addition, the lender is required to give you an itemized good-faith estimate of your closing costs and a government publication that explains those costs.

Since the home that you're purchasing will serve as collateral for the loan, the lender will order a market value appraisal of the property. The lender will not lend you more than a certain percentage of the value of the property. If your down payment will be less than 20 percent of the value of the property, your loan will require private mortgage insurance, and the lender will obtain insurer approval. If the lender has not already done so as part of a pre-approval process, it will verify your employment and bank accounts as well as obtain and evaluate your credit report.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.