Before you apply for a mortgage for your new home, ensure you are properly prepared by following these simple steps.
Following these steps will save you time and heartache in the mortgage application process.
Step 1: Figure out what you can afford
How much house can you afford? Mortgage companies have calculations for how much you can borrow. But, it is important to have your own budget and calculate how much you believe you can afford every month, since you may have important expenses the finance company does not take into account.
For example, mortgage lenders will look at your income and your fixed expenses, such as your mortgage payment, property taxes, and your consumer debt, such as car loans and credit cards. You may have additional expenses you are not willing to give up that lower the amount you can afford. Are you paying tuition for yourself or your child to attend school? Do you expect to need a new car or appliances in the near future?
You should also factor in the items that will help you to afford a higher mortgage. Will you get a substantial tax break from the interest on your mortgage loan? Do you have income the lender will not take into account, but which will improve your monthly cash flow?
Factor these items into your budget and make sure you are confident with the amount your mortgage lender says you may borrow.
Step 2: Check your credit
Most mortgage lenders look at your credit score before they will even send you the paperwork for your loan. It is important for you to know exactly what is on your credit report and to ensure it is accurate.
Inaccurate credit data can skew your score lower than it ought to be. Are there cards shown on your report that you closed? Do cards you closed show that they were closed at your request or at the request of the company? Is there a late payment shown in error?
Remedy any credit report errors by contacting both the reporting company and the credit bureaus. There are three bureaus; you need to contact all of them as they use different information on their reports. Allow several months to clear up any major errors on your credit report.
Step 3: Gathering your records
Before you contact your lender, it is important to have accessible and accurate financial records. Expect to provide proof of all of your income sources and financial assets. Records you should have ready for your lender include:
- Recent pay stubs, usually 3
- Tax records from the previous 1 or 2 years
- Bank and investment account statements
- Credit card numbers, billing addresses, current balances, and available credit amounts
- Information on other outstanding loans, such as car loans or personal loans
- Information on any other property you own or may be selling
- Proof of additional income or payment obligations, for example alimony or child support
Step 4: Pre-qualification
Once you have an idea of how much you want to borrow, you've ensured your credit report is accurate and clean and you've assembled all of your records, you are ready to speak to a lender. Your individual mortgage lender or broker will take you through the pre-qualification process. This is a summary of your financial situation, in which you will evaluate your ability to secure a home loan.
Your lender will access your credit report, and interview you to assess your needs as well as incorporate the latest interest rates and available loan options into a formula to determine whether you are truly qualified for loan approval. Your success in this stage will allow you to proceed to loan pre-approval. A pre-qualification letter from your lender can help strengthen an offer you make on a home, so make sure to ask for one when you finish this step.
Step 5: Decide what kind of loan you want
Finally, you're ready to apply for a loan. But, what kind of loan do you want and need?
There are many types of mortgages. The most common are fixed rate, where the interest rate is established at the outset and never changes, adjustable rate, where the interest rate varies based on current economic conditions or hybrid loans where the rate may be fixed for a certain number of years and then convert to an adjustable rate.
The key factors in determining the best kind of loan for you are how long you intend to keep the home and the amount of risk you'd like to take.
Generally, adjustable rate loans have lower initial interest rates, but are riskier. Because the rate can change, it is more difficult to accurately budget for your payment. If you are planning to remain in the home for only a short time, an adjustable rate or hybrid may be your best option since there will not be time for the rate to increase substantially before you sell.
Fixed rate loans have less risk, since the interest rate is set for the duration of the loan. The rate is usually slightly higher than an adjustable mortgage but it remains the same for the entire life of the loan. Thus, your loan payment will never go up.
Once you complete these steps, you are ready to apply for your loan. You have the knowledge and tools you required to purchase your home.
