It’s been said success is 90 percent preparation and 10 percent perspiration. This is absolutely true when it comes to qualifying for a home loan. Preparing to apply for a mortgage based upon the following advice will help you find a lender offering terms within which you can comfortably enjoy your new home.
Here’s what you need to do.
Check Your Credit Report
It’s one of the first things any creditor will do upon receipt of a loan application from you, so knowing what they’ll find is definitely to your advantage. You’re entitled to free copies of your credit report from each of the three main reporting agencies (Experian, Equifax and Transunion) each year.
Look them over to ensure all of the information they contain is accurate.
You should also always know what your credit score is so you can keep an eye on it. Be particularly mindful of accounts you don’t recognize, as well as discrepancies regarding the status of your accounts. Those factors can diminish your creditworthiness if they drag your score down. Request corrections if you find incongruities.
Gather Financial Documentation
Lenders are going to want to see proof of steady income. This usually entails a month of pay stubs, two years of tax records, ninety days’ worth of bank statements and ready explanations for abnormally large deposits or withdrawals.
Pay Off Debts
One the measures lenders will apply to your creditworthiness is your debt to income ratio. They’ll look to see how much money you owe balanced against how much money you have coming in. Paying off debts (but leaving accounts open) will lower your ratio, giving you the appearance of a more favorable risk.
If ongoing debt is a significant problem, consider working with a debt relief company to come up with a strategy for eradicating your outstanding obligations as quickly as possible. Just be sure to look for background information first, like these Freedom Debt Relief reviews, to be certain you’re choosing a reputable program if you do go that route.
Shop Lenders for the Best Terms
Each application for credit you submit has the potential to slightly lower your credit score. However, a series of applications for the same type of credit within a two- to three-week period is usually looked upon as exactly what it is — shopping for a loan. As a result, they are treated as a single inquiry. Tip: If you are an older borrower, consider shopping reverse mortgage lenders the same as you would a traditional loan as rates & fees vary between these niche lenders.
So rather than applying blindly to any lender offering home loans, take some time to see what each one is offering, then choose the one or two best suited to your situation. You can then submit applications simultaneously, rather than here and there over a period of several months.
Gather a Down Payment
The basic rule of thumb dictates offering 20 percent of the purchase price as a down payment on a mortgage loan. This means you’ll need to be in a position to offer $50,000 as a down payment to get the most favorable interest rates and a loan free of mortgage insurance if the house you’re looking at is selling for $250,000.
Yes, it is possible to purchase a home with less cash down, but you’ll pay more interest on the loan and you’ll be required to carry mortgage insurance to guarantee the lender repayment if you default on the loan. These requirements will make your monthly payment higher, which could affect your ability to get a loan. If you only have five percent of the purchase price, you’ll need to make sure your debt to income ratio will support the higher monthly payment it will dictate.
Institute a Buying Freeze
That new car can wait until after you get the house. Ditto any new credit card accounts or other major purchases. You want your ability to pay to look as good as possible. Adding debt will diminish your aura of responsibility. Just chill until you get the pad, then you can flip for the new ride — or whatever.
These are five of the primary things you’ll need to accomplish when preparing to apply for a mortgage. There are other considerations as well, such as choosing between a 15-year loan and a 30-year loan, as well as deciding upon a fixed-rate mortgage or an adjustable.
However, nailing these basics will get you started on the right foot.
