How to apply for a home mortgage

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Spring weather has arrived in the Northland, and the home-sale market is heating up, too.

As more for sale signs pop up and more buyers look in earnest, it's a good time to consider financing a new home and the steps you'll need to take as a buyer to be prepared. I tell clients to consider the financing side of home purchasing before they start looking for that new home. That way, they know exactly what to expect and what they can afford. Here are some of the fundamentals you need to know as you begin the process of applying for and qualifying for a mortgage loan:

Gather your documents. Your lender will want to see evidence of your current financial situation as well as your financial history. You'll need to provide your W-2 statement for the last two years and your paycheck stubs. If you are self-employed, you will need your personal income-tax returns from the last two years and possibly your business tax returns as well. Your lender needs to verify your income as well as your employment status and history. If you have gaps in your work history, be sure you can explain them and show how your situation now provides a steady income stream.

Credit is crucial. Lenders will want to review not only your credit score but also your overall credit depth. If you have a great score but not a lot of credit history, you still may not be able to qualify for a loan. Especially for first-time homebuyers, showing a strong history of borrowing and being able to repay those funds is important. Lenders usually like to see at least four lines of credit that have been open, with a solid repayment record, for the past 12 months. But be wary of opening a lot of new credit cards or other credit accounts right before you apply for a loan, as these may bring down your credit score.

Non-traditional forms count, too. As you assemble your credit documentation, don't forget non-traditional forms such as proof that you are current and have made timely payments for rent, utilities and recurring expenses such as home and car insurance. These are not traditional forms of credit, but they count in your favor if they show you as a reliable payer of your bills. Ultimately, that's what a mortgage lender wants to see.

Ask about credit help. If your credit score is not where it needs to be, or if you don't have sufficient credit depth, ask your lender about credit-building tools that can help. Community banks often have "credit builder" programs that allow you to take out a loan, place the proceeds in savings and pay the lent money back over time. It's an easy, simple and safe way of building your credit while also building up a savings account to help with your home purchase.

Debt-to-income ratio matters. After reviewing your financial situation, your lender will do a calculation to determine your debt-to-income ratio. This is simply a tally of all of your credit payments and other recurring bills, along with your anticipated new house payment, divided by your income. Your debt-to-income ratio should never exceed 45 percent. If it does, you may only qualify for a smaller house payment, may need a larger down payment or will have some work to do to get your finances in better shape.

Explain large deposits. If you have recent large deposits in your bank account, your lender will ask you about them. Be prepared to explain them. Your lender needs to be sure that these are not borrowed funds that you will need to repay at some point. Keep a paper trail of any large deposits, such as proceeds from a car sale or funds transferred from other accounts.

Shopping for a house is exciting, whether it's your first one or simply a new place to call home. You'll be prepared to make the deal on the new house you want if you know what to expect when it comes to financing that purchase, and especially if you have started early and are pre-qualified to make an offer.

Steven Raj is vice president of lending at Park State Bank in Duluth. You can reach him at stevenr@parkstatebank.com or (218) 727-8001.