Know What You Can Afford
How much of a mortgage you can afford is affected by several things, including your expected mortgage payments, living costs, debt repayments and other financial obligations. While mortgage lenders will consider all of these, itâs important to be honest with yourself about what you can afford.
Only you can fully understand your financial and lifestyle needs. Things like how much you spend on childcare, groceries or supporting your parents can be missed in the mortgage application process. On top of that, your future plans could change your financial situation. While you donât need to tell your bank if you plan to quit your job or have a child, these events would seriously affect your ability to afford your mortgage. You should also factor in other purchasing costs, like home inspections and closing costs . Remember that youâll have to pay for utilities, upkeep, property taxes and repairs too.
Make Sure Your Credit Score And Credit Report Are In Good Shape
Your is one of the most important factors that’s related to your financial health since lenders use this as well as your to determine the interest rates you’ll qualify for when applying for any line of credit or loan.
Interest rates can make borrowing money even more expensive. The higher the rate, the more costly it will be to take on that loan or line of credit. The same idea rings true for mortgages as well.
Keep in mind that some mortgage lenders do cater to borrowers with lower credit scores. When applying for a new line of credit or a loan with a lower credit score, you’ll likely end up receiving a higher interest rate since the lender will view you as more of a risk.
Conversely, having a higher credit score typically results in getting a lower interest rate, making it more affordable to borrow money, so it’s in your best interest to work on improving your credit score before submitting any mortgage applications. Continuing to pay your bills on time is the most important thing you can do to help raise your credit score.
Think How Long Youll Be In The Home
Along those same lines, try to determine your expected tenure ahead of time.
If you know or have a good idea how long youll keep the property, it can be instrumental in loan choice.
For example, if you know youre just buying a starter home, and have pretty strong plans to move in five years or less, a 5/1 adjustable-rate mortgage might be a better choice than a 30-year fixed.
It could save you a ton of money, some of which could be put toward the down payment on your move-up property.
Conversely, if youre thinking forever home, it could make sense to get forever financing via a fixed-rate product.
And also pay mortgage points to get an even lower rate youll enjoy for decades to come.
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What Documentation Do You Need
Throughout the entire application process, you’re proving your creditworthiness to lenders by providing official statements that outline your financial status, along with other legal and certifiable documentation.
Youâll need to verify your annual income, which means supplying tax returns, recent pay stubs, or other proof of income. Lenders might also request the following: bank statements, credit history, rental history, and assets and debts. Additional documents you should have on hand include a signed copy of the sale agreement between you and the seller, identification, and, if necessary, documents that explain credit blemishes like late payments and run-ins with collections.
Mortgage Payments Must Fit Your Budget
We all have ideas of our dream home, whether its a swimming pool in the backyard or lots of space for relaxing and hosting family and friends. However, these homes may not be in your budget. Before you start looking at houses, you should know what you can realistically afford. As a rule, you shouldn’t spend more than 43% of your income on your monthly debts. Run your numbers through a mortgage calculator before you start looking for a home so you can see what’s in your budget.
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There Are Many Different Mortgage Options Available
There are a variety of different mortgage options available to suit all lifestyles and budgets. A 30-year mortgage is the most popular, but your loan term could be as little as 10 years. Most mortgages have a fixed interest rate, which doesn’t change over the life of the loan. However, if you’re willing to accept a degree of risk, you might opt for a mortgage with an adjustable interest rate. These usually have much lower interest rates for a limited amount of time, but the interest rate could become much higher if interest rates rise.
Discuss your lifestyle and budget with your lender to determine which mortgage option works best for you.
Apply For Mortgage Preapproval
Preapproval is the process of learning how much a lender is willing to lend to you. When you apply for a preapproval, lenders take a look at your income, assets and credit, and tell you how much they can lend you. Theyll also determine your interest rate.
Although similar in name, a preapproval shouldnt be confused with a prequalification. Prequalifications are less accurate than preapprovals because they dont require asset verification. While a prequalification can be helpful, it wont give you the most concrete idea of how much money youll be lent, whereas a preapproval can. Thats because lenders require you to provide documents for the preapproval that help prove your income and debt obligations to ensure youre eligible for the mortgage.
Getting preapproved for a loan and knowing the amount of money you will receive will help you narrow your property search, and make you more appealing to both sellers and real estate agents.
Check Your Credit Score
The first thing youll do when you apply for preapproval is answer a series of questions about yourself, your income, your assets and the home you want to buy. You’ll then give your lender permission to look at your credit report.
Your credit report is a record of your borrowing history from any lenders and creditors youve worked with in the past, including credit card companies, banks, credit unions and more.
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What To Do If You Cant Get Preapproved
If you cant get a preapproval, ask the lender why you were denied. If its an issue you can remedy, like an error on your credit report thats causing the lender to reject your application, you can address that right away and seek a preapproval again when its resolved.
If you credit score is too low or other financial roadblocks prevent you from being preapproved, you can work to improve those areas, too. Raise your score by making payments on time and paying down your debt load, for example, or lower your debt ratio by finding a way to increase your income. Depending on your situation, this could take time, but itll go a long way.
Some lenders have very stringent qualifying criteria, so another option is to work with a different, more flexible lender. If youre an account holder with a local bank or member of a credit union, these institutions might be more willing to work with you to get you preapproved.
Gather All The Documents Youll Need To Apply
Time estimate: A couple of hours, depending on how organized you are
When filling out your official loan application, youll need some documents to prove your income, debts, assets, and more. Lenders use this information to gauge your risk, as well as assess how much you can comfortably afford payment-wise.
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Low Savings Account Balances
If you lose your job or get an unexpected medical bill, will you still be able to afford your mortgage payments? Lenders need to know that you have more than enough money in savings to cover your home loan. Each lender has an individual standard for how much you should have in savings, but most want to see at least a few months worth of payments in your account. They also want to see that you can pay your down payment and closing costs without help.
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Min. credit score
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Golden 1 offers a cost-saving real estate agent program, plus a range of loan types, including jumbos.
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Opening Lines Of Credit
You can still be denied a mortgage even after being pre-approved for one. Mortgage lenders check your credit during pre-approvaland again just before closingbefore giving you the final green light. In the interim, maintain the status quo in your credit and finances. That means not opening new lines of credit or closing existing lines of credit. Doing so can lower your credit score and increase your debt-to-income ratioboth key reasons for a lender to deny final approval.
Instead, wait until after youve closed on your home to take out new lines of credit . And while its great to pay off a credit card account or loan before you close on your home, closing the account removes that credit history from your report. Length of credit is one of the key factors credit reporting bureaus use to generate your credit score.
Instead, leave the account open and active, but dont use it until after closing.
Some credit card companies may close your account for long-term inactivity, which can negatively affect your credit, too. Keep accounts active by making small purchases that you pay off immediately and in full every month.
The Importance Of Being Prepared
The most common reason for delays in getting approved for a mortgage is missing or incomplete information. As a home buyer, the best way to make sure your mortgage or pre-approval application is processed as quickly and accurately as possible, is to bring all the information you need with you when you meet with your mortgage professional.
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Pay All Your Bills On Time
When applying for a home loan, its important you have a good credit history, which includes paying all your bills on time, every time. A late payment may negatively affect your credit score, and that can play a part in whether youre approved for financing and, ultimately, the rate and term you may receive.
Even after your home loan closes, its still important to pay your bills on time, as this could affect your ability to apply for future loans.
How Many Bank Statements Do I Need To Provide
Youll usually need to provide at least two bank statements. Lenders ask for more than one statement because they want to be sure you havent taken out a loan or borrowed money from someone to be able to qualify for your home loan. Two is typically the recommended number because any loans you take out beyond a 2-month timespan will have already shown up on your credit report.
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Not Now Doesnt Mean Never
Home ownership is just not a realistic option for everyone right now, despite what may look like once-in-lifetime mortgage rates. If you fall into this category, dont despair. Your financial circumstances could change, the economy is still very much in flux, and remember that the current mortgage crisis involved a lot of home buyers getting in over their heads. When it comes to a major purchase like a home, timing is critical.
Now that you know more about how to prepare for a mortgage, get your Credit Report and Score.
Apply For A Mortgage With Multiple Lenders
Its a huge mistake to accept the first mortgage quote you get.
Many first-time home buyers dont know it, but mortgage rates arent set in stone. Lenders actually have a lot of flexibility with the interest rate and fees they offer.
That means a lender youre looking at might be able to offer a lower rate than the one its showing you.
In order to get those lower rates, you have to shop around and get a few different quotes. If you get a lower rate quote from one lender, you can use it as a bargaining chip to talk other lenders down.
Shopping around for mortgage rates also lets you know whether youre getting a good deal.
For example, a 3.5% rate and $3,000 in fees might sound all right if its the first quote youve gotten. But another lender might be able to offer you 3.0% and $2,500 in fees.
That makes the first offer a lot less appealing but you wont know it until you look around.
Get at least three mortgaeg quotes
Compare personalized rate quotes from at least three lenders to make sure youre getting the best deal. A mortgage broker could help you compare multiple quotes at once.
And make sure youre comparing apples-to-apples quotes. Things like discount points can make one offer look artificially more appealing than another if youre not watching out.
Different down payment amounts, loan terms, loan amounts, and mortgage loan types will skew loan estimates, too.
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What Should You Do Before Applying For A Mortgage
Before you apply for a mortgage, you should check your credit reports and scores with all three credit bureaus. Make sure no mistakes are hurting your scores. If your scores are below 620, learn what you can do to improve them. The closer you can get to an excellent score of 760, the less expensive your mortgage will be.
Make sure you have at least 3% saved for a down payment unless youre eligible for a Veterans Administration loan. Ideally, you should save even more to pay for closing costs, keep an emergency fund after closing, and put more toward your down payment to save on mortgage insurance.
Shop Around Before You Apply For Any Mortgage Loan
Before you apply for a mortgage, it’s a good idea to shop around for the best home loan deal available. You’ll need to figure out where you want to get your loanthrough a broker or by going directly to the bank, for exampleas well as keep your eyes open for the best interest rate and lowest closing costs. Always talk to several sources to find the best mortgage deal that you can get.
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Fill Out Your Mortgage Application
Time estimate: About one to two hours per application
The application will ask about your income, monthly debts, employment history, and assets. Youll also need to provide details about the home youre purchasing and agree to a credit check.
To make sure youre getting the best rate and terms, you may want to fill out applications for several lenders.
Each lender will then review your application and provide you with a loan estimate an official form detailing all the fees and charges your lender or any third parties will charge at closing should you proceed with the loan. Use these documents to compare your offers and choose which lender to move forward with.
Figure Out What Loan Term Is Right For You
When you borrow money to buy a home, you can generally choose to pay it back over 30, 20, or 15 years. Some lenders also offer other mortgage repayment terms .
If you can afford a higher monthly payment, it could pay to get a loan with a shorter term because that will usually result in a lower interest rate on your mortgage. You can also see if an adjustable-rate mortgage makes sense based on rates and your plans to stay in your home. With an adjustable-rate mortgage, you’re only guaranteed your initial interest rate for a preset period of time, after which it can rise or fall — so there’s risk involved in going this route.
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Ten Important Factors To Consider When Applying For A Mortgage
Before hunting for your dream home, if you’re not paying cash, youll need to be approved for a mortgage. Key factors, like knowing which type of loan works best for you and how a down payment affects your monthly mortgage payment, can help you narrow things down. Other key factors, like knowing your credit score and having proof of income, can help you get approved.
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