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Getting a great mortgage is extremely important for just about anyone. But you need to know what to do in order to make it happen. It’s not going to be super easy to get a new job or improve your credit history length, but that doesn’t mean all is lost.
There are still things that you can try. You may not succeed with all of them, but knowledge is going to be a major part of the process.
1. Decide Which Type of Mortgage Do You Want
First up, you should know that there are a lot of different kinds of mortgages. There are different interest rates, fees and flexibilities in each of them too. And all of that will impact just how long it takes you to pay off that loan and how much it will cost you to do it. When it comes to interest you could have a fixed, floating or combination option. You could also have choices in repayment structure. If all of that isn’t enough to make you dizzy I don’t know what is. So let’s look a little closer.
You want to think about how you’re doing financially before you pick the mortgage you want.
From there, you’ll be able to look at the different offers that are available to you. Not only that but you can make a better decision about the right offer because you’ll have a good foundation.
2. Shop Around
You will find literally hundreds of different options when it comes to a home loan. That means you should definitely not be taking the first one that you find. Instead, you should pay attention to what you can reasonably do and then look at the options that are out there. That’s when you want to go through an application.
Buying a home requires you to shop around and compare the things that different offers are going to give you. You want to compare your costs and your terms and you definitely want to negotiate.
A newspaper in your area or even the internet can be great places for you to find out about different loans. You can find out about the lenders and what they’re offering, like interest rates and points. Make sure you check frequently though, because these things can change without notice. Of course, you’ll also need to talk to the lender because you’ll need to know things like fees. By the time you’re done with this process, you could save thousands.
3. Know What to Ask
You need to be prepared to talk with a mortgage lender. If you don’t know what you’re doing it could be stressful and extremely difficult. In fact, it’s likely to be both of those things even if you do know what you’re doing.
Keep the important questions you need to know in your mind when you’re going through these meetings though. You don’t want to end up with the wrong mortgage because you were too stressed to remember your questions.
4. Don’t Make a Large Purchase
Getting approval for a loan is not the final step. They’re going to keep looking at your credit and your finances all the way until you sign the final papers at closing. If they haven’t given you a check yet they can take away your approval. That means you don’t want to finance anything big until after you’ve closed. It means not buying furniture or a car (unless you’re paying cash) until you’ve signed those final papers on the dotted line and your mortgage company has handed over a check.
Of course, even if you buy with cash you may still have some problems. Large expenditures can definitely be a red flag for lenders and they’re going to be looking at your bank account too. Make sure you pay attention to what you’re spending and what’s still available in your bank account, until that check is handed over at least.
5. Understand How Much You Can Afford
The general rule is that you can afford to pay for a mortgage that’s up to 2 or 2.5 times your gross income.
You’ll want to pay attention to what your current income is so you have a better understanding of what your maximum will likely be. But keep in mind that this isn’t set in stone. There are other factors at play.
Another way to look at things is to look at the interest rates that are going right now as well as underwriting rules. Then look at your down payment, income, debt and of course your credit score. All of these things will play into how much money you can get from a lender.
Keep in mind that while online mortgage calculators can be a good tool they are not set in stone either. Just because you can put in your income, your expenses and your score and get a set number doesn’t mean you’ll find a lender who will give you that amount.
6. Get Your Papers in Order
Your lender is going to require certain documentation, and if you can’t provide it there’s going to be a lot of problems for your mortgage. That means you should do everything you can to get your paperwork ready before you go in. You’ll need things like bank statements and loan statements, ID, a W-2 (or a couple), tax forms and paystubs.
If any of these documents are missing or you can’t locate them you’ll need to contact whoever is in charge of them, your place of work or the government, for example, to get new copies. By having all of these documents ready before you go in you’ll speed up the loan process.
7. Pay Attention to Red Flags
If you have a lot of debt it makes it harder for you to pay back your loan. Even if you think that you’re going to be fine, a lender may be unwilling to work with you. Having multiple credit cards might mean you should consolidate debt. Having a high limit that you don’t reach could be improved by lowering your limit. Consolidating multiple personal loans is another way to improve your red flags. You want to make sure that you prove you can pay back a loan.
Your loan underwriter is not going to want to see newly deposited money that seems to come out of nowhere.
Since your down payment can’t come from someone else they need to prove where that money came from. They need to know about your assets and about your cash flow. All of these things are going to be verified to make sure you can afford your house.
Make sure that all of your assets are going to be in your account long before you apply for a mortgage. And make sure that everything you have is reasonable based on the amount of money that you earn.
On top of that you’re going to want to look at your history of employment. The longer you’ve been with the company you’re currently employed with, or at least in the same industry, the better it’s going to look for you.
Any strange aspects of your financial records are going to be important as well. Make sure you can account for everything and work out the problems before you’re asked to by an underwriter. Look for an institution that will prequalify or preapprove you before you get started. That way, you can get a good idea of whether you’re in good shape or not.
8. Know Your Debt-To-Income Ratio
This is going to be one of the most important parts of your mortgage application. It’s how much money you have coming in compared to just how much money you have going out in any given month.
If you have approximately $4,000 coming in each month from normal income and $1,000 going out in payments your debt-to-income ratio is 25%. What you’re trying to get to is less than 43%, because that’s about where most lenders will consider you a good risk. For those who are higher than that, it’s important to look at ways to lower your ratio.
If you are over 40%, however, most lenders are going to question whether you can really afford a mortgage. If you can pay off debts like loans and credit cards you can decrease your ratio. While you won’t get any benefits for paying off things early, you’re going to improve your financial outlook.
9. Check Your Credit Score
Before you allow someone else to look at your credit report by applying for a mortgage you want to know what it looks like. Go over your credit report carefully so you know all the details and then get problems taken care of. You want these fixed before an underwriter looks at your report.
AnnualCreditReport.com will provide you with a copy of your report. In fact, this website is backed by the government and offers credit reports from all of the major reporting bureaus. You get a single copy of each one every year. Make sure that you look at one of these and that you’re paying attention to all the details. If you have any incorrect information you want to go through credit repair immediately.
Your credit score isn’t going to be on that report unless you pay for it. You can get a free version though from CreditKarma.com, NerdWallet.com or CreditSesame.com. These sites are free and you can sign up quickly to get a copy of your score.
If your score is at or above 720 you’re likely going to have no problem getting a mortgage. If you’re somewhere above 620 but under 720 you’ll have higher interest rates in most cases but getting the mortgage should still be easy enough. On the other hand, someone under 620 may struggle to get approved at all.
10. Have Your Down Payment
Assets are going to be extremely important for your mortgage as well.
You need assets for a down payment, reserves and closing costs. Having a little extra money in your account is good too, because it shows the lender that you’re safe in case of an emergency.
The important thing here, however, is to show where the money came from. You need to be able to document this with bank statements and more. These will show that you routinely save and that you’re following a pattern to get the money together.
Make sure you put the money you’re going to use into an account at least 2 months in advance of applying. That’s going to show that you have had the money for a while and that it’s been ‘seasoned’ to use the proper term. It means that you’re not getting money in and out of the account and you won’t need to explain where it came from.
Putting money into a savings account and not moving money around for at least 90 days is generally your best option.