For most people, getting a mortgage is the only viable way for them to acquire the property that they have been dreaming of. If you are considering this option to buy the house that you want your family to live in, make sure that you are prepared for it.
This article lists down some of the most important details that you need to know before applying for a mortgage:
Determine What You Can Afford
One of the primary things that you need to know before applying for a mortgage is the amount that you can afford to pay for the house that you are interested in.
In this case, you can even leverage an online calculator to help you calculate repayment amounts that you will need to settle monthly. In this way, you will have a good idea of the amount that you need to factor into your monthly budget once your mortgage is approved.
You should also try to get a figure of the loan amount that you qualify for. When you get in touch with a lender, they will likely provide you with a certain amount that you can borrow based on your debt-to-income ratio (DTI).
Your DTI is the amount of money that goes towards your debt monthly. Some lenders will only provide you with a meager amount for the reason that you should not be spending more than 28% of your income on your mortgage payments.
In parallel to this, you should not be spending more than 36% of your income in payment for your mortgage combined with all your other debts.
In this case, what you can do is improve your DTI. This is particularly true when you are told by the lender that you don’t pre-qualify for a loan that is big enough to cover the amount that you have to pay for the house that you want.
To do so, you can find means to increase your income because you will most likely be eligible for a bigger loan if you make more money.
On the other hand, you can also reduce your debt by paying more than the minimum amount that you are required to in each month. The latter is sometimes a more viable option especially since for most people, making more money can prove to be quite challenging.
Learn How to Save for a Down Payment
Another thing that you need to know before applying for a mortgage is how to save for a down payment. While it is true that some brokers and agents are offering real estate properties with a zero down payment, there is always a catch.
When you are not required to make any down payments at all, you will most likely pay a higher interest rate in your monthly mortgage. Aside from this, you will also be required to get private mortgage insurance (PMI) later on.
Thus, to save money in the long run, make sure that you learn how to save for a down payment before you pursue a mortgage application. A good rule of thumb is to save enough to cover 20% of the value of the property that you are interested in.
In this way, you will no longer be required to get a PMI, plus the amount that you will have to loan is now only 80% of the value of the property. It will even be better if you can save a bit more down payment to further reduce the amount of money that you will need to borrow.
In this case, you need to explore various ways how you will be able to save for the down payment of the property you wish to acquire.
For instance, you can begin by putting your spending on hold, avoiding the temptation of having to swipe your credit card, especially months or weeks before you go for a home loan.
Apart from having your new debt eat up your DTI, you will also save a bit more money that can go towards the down payment for the property.
There is also the option for you to skip going on a vacation for a year in an attempt to add to your savings or reviewing your expenses to look for what you can further reduce or eliminate.
You can also make the effort to transfer a fixed amount into a special kind of savings account dedicated to your down payment. You can even get a second job if necessary just to increase the amount that you can make for a down payment.
Understand What Your Credit Score Means
Before applying for a mortgage, you should take the time to understand what your credit score means because lenders will most likely check your credit score first to determine your financial standing and paying capacity.
The reason behind this is that your credit score is a numerical gauge that indicates your creditworthiness. The higher your credit score, the more credible you look to a lender.
Hence, put in the effort to improve your credit score by carefully reviewing your credit reports. In this way, you should look for the items that are working in your favor, as well as those that are not.
From there, you can already take the necessary steps to correct the latter, such as errors that may affect your credit score negatively. You should also ensure that you are paying your bills on time because your payment history will have the biggest impact on your credit score.
Thus, to avoid any late payments, you can create a filing system that will help you keep track of your monthly bills.
There is also the option for you to consolidate your debts to pay them all off and increase your credit score. In this way, you only have to manage a single payment which can be quite easy to track and deal with.
There are also credit monitoring services that you can consider to keep track of how your credit score can change over time. Rest assured that many of these services are free of charge.
You should also aim for a credit utilization that is under 30%. Your credit utilization is the portion of your credit limit that you are using at a certain period. This is the second most important factor that can affect your credit score, which is why you need to familiarize yourself with your credit utilization.
In this case, what you can do is to pay your credit card balances in full each month to keep your credit utilization in check.
Know the Loan Options Available
Conventional Mortgages
You should also familiarize yourself with the loan options that you have before you apply for a mortgage. For instance, there are conventional mortgages or those that can be used for your primary home or investment property.
Under this type of mortgage, you get to choose between a conforming and non-conforming loan. The former simply means that the amount you borrowed falls within the maximum limit set by the FHFA while those that don’t meet the guidelines fall in the latter.
Non-conforming loans are also sometimes referred to as jumbo mortgages. With this type of loan, you will be able to borrow a significant amount of money that you can use to buy a property in an expensive area.
Fortunately, the interest rates of jumbo loans tend to also be competitive with other conventional loans.
However, it is mandatory for you to make at least a 10-20% down payment and that your credit score should be extremely healthy to be eligible for this type of loan.
Fixed-Rate Mortgages
Another type of loan that you can consider is a fixed-rate mortgage that keeps the same interest rate over the entire duration of your loan.
This type of loan is best in case your monthly principal and interest payments stay the same throughout the life of your loan.
With a fixed-rate mortgage, you even get to precisely budget your monthly expenses.
However, you may generally pay more interest with a longer-term loan and it may also take longer to build equity in your home.
Adjustable-Rate Mortgages
There is also the option for you to consider an adjustable-rate mortgage (ARM) which bears a fluctuating interest rate that can either go up or down depending on the current market conditions.
With an ARM, you will get to enjoy a lower interest rate in the first few years of your homeownership. From there, you will be able to save a substantial amount of money on your interest payments.
However, your monthly mortgage payments can also become less affordable, leading to a loan default.
Figure Out How to Find the Right Lender
Lending Landscape
You need to figure out how to find the right lender before you apply for a mortgage. In this case, you need to understand the lending landscape, familiarizing yourself with some of the most common types of home lenders.
For instance, there are credit unions, as well as mortgage bankers. The former are member-owned financial institutions that often offer variable interest rates to shareholders. On the other hand, the latter work for a specific financial institution.
There are also correspondent lenders that rely on a pipeline of other lenders, as well as savings and loans that are often community-oriented.
Mutual savings banks are thrift institutions that can also help you with getting the money that you need to buy the property that you are after. Just make sure to check whether the lender that you are considering is registered in the state where you are in.
To do so, you simply need to explore online sources to find listings, as well as review sites for unbiased information.
Pre-approval Process
To find the right lender, you should also take the time to get pre-approved. In this case, you may need to provide lenders with some of your financial information such as your social security number, as well as your bank, savings, checking, and investment account information.
You may also need to tell them your outstanding debt obligations, including your credit card or car loan balances. Most lenders will also require you to provide your salary and employer information.
Comparison of Rates
Aside from getting pre-approved, you should also compare rates from several mortgage lenders. In this case, you can begin by searching online sources but you have to consider that the rates you see online are merely estimates.
When you engage with a lender, make sure that you ask the right questions for you to get the answers that you are after. As much as possible, you should also take the time to read the fine print.
Try to Get Your Paperwork in Order
Finally, you should try and get your paperwork in order before you apply for a mortgage. This means that you need to gather all the documents that you need before the application process even begins.
Hence, it will be worthwhile to start collecting your payslips from a recent couple of months, as well as your tax returns from the past year. You should also begin collating your bank statements, credit card, as well as loan statements.
You should also exert the effort to collate proof of your assets such as your retirement funds and other investments. This will significantly help you with your mortgage application later on.
Conclusion
When it comes to applying for a mortgage, make sure that you have exerted the effort to determine what you can afford as well as how you can save for a down payment.
You should also take the time to understand what your credit score means and how this can impact your application for a mortgage.
It is also important for you to know the loan options available for you before you can figure out how to find the right lender.
From there, you can already try to get your paperwork in order. All these are geared towards ensuring that you won’t bite off more than you can chew when it comes to applying for a mortgage.
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