How To Be Prepared

Lenders grade different borrowers according to their "underwriting guidelines". These are rules lenders have for analyze their mortgage applicants. These rules change for different loan types. For example, a lender will have different requirements for a 30 year fixed loan than for a loan that is fixed for 2 years and variable for the next 28 years (a 2/28 loan).

Different lenders will have different underwriting guidelines for the same loan product. For example, different lenders may have different requirements for the same exact person applying for a 30 year fixed purchase loan.

Credit Report

If you have credit issues the first thing you need to do is check your credit report. You can challenge errors in your credit report.

Your credit report will generally have your credit track record for the past 7 years. This will include "trade lines" you have had for all these years. These "trade lines" can include credit cards, mortgages, car loans, student loans, and collections.

Your credit report will list any accounts on which you have been "delinquent" in some way. This can include a late payment on a car loan or not paying a cell phone bill that was sent to collections. Late payments are usually separated into 30 days, 60 days, 90 days, or more categories. If you were late once 2 years ago by 30 days on a mortgage payment this may be regarded as an honest mistake. If you are perpetually late by only 30 days on your credit card bills you may be seen as a sloppy payer. If you are late on your mortgage this is usually the worst thing you can do from a mortgage lenders perspective.

You can also clean up small items that remain on your credit report. Lenders can often be irritated by a person with lots of tiny little credit problems, such as a few $20 collections for different cell phone bills. This indicates to a lender that you don't manage your credit seriously. You can pay off these debts and get a confirmation of the payoff. You may include this confirmation in your mortgage application, and send copies to the credit bureaus for them to update your report.

Letters of Explanation

You may need to provide a lender with letters of explanation about specific weaknesses in your application. You may have had a temporary medical problem or previous unemployment that caused you to have some payment and credit problems. A clear letter of explanation to the lender included with the application up front may help the lender understand you better. Lenders do not like to look at the same loan file again and again as you slowly supply explanations and additional information about your credit.

Reserves

Some lenders also require a borrower to show "reserves". These reserves are liquid assets such as cash, and can include such items as retirement accounts. The lender usually likes to see that you have had this money in your bank account for at least 2 months. A lender may require you to have 3 months reserves in your bank account, meaning you should have at the time of the loan the ability to pay the mortgage for the next 3 months.