Banks have loosened minimum requirements and lenders are offering mortgages with down payments as low as 3%; is this a sign that it’s time for you to purchase a home?
Purchasing a home and applying for a mortgage is never easy. You can make the process easier by preparing for the mortgage loan process ahead of time and knowing what to expect.
Below are 10 tips you should take now to ensure you’re properly prepared to apply for a mortgage.
Types of Mortgage Loans
Before diving head-first into how to prepare for a mortgage, it’s important to understand the types of mortgage loans and how they relate to your financial situation.
- Conventional mortgages: Most common type of loan, ideal for borrowers with strong credit (620+), stable income history, and a down payment of 3% or more.
- Adjustable-rate mortgages: These are fluctuating interest rates that go up and down depending on market conditions. If you plan on living in your home for a short period of time, adjustable rates can save you big money on interest payments.
- Fixed-rate mortgages: Fixed-rate mortgages keep the same interest rate over the life of your loan. Whether that’s 15,20, or 30 years. If you plan to stay in your home 7-to-10 years, this offers stability.
- Government-insured mortgages: FHA loans, the U.S. USDA loans, and VA loans are all considered government-insured loans, and all offer different benefits. These are for those with fair to good credit and low cash savings.
- Jumbo mortgages: This type of loan is for borrowers with excellent credit that are looking to buy in an expensive area and high-end homes.
10 Tips When Preparing for a Mortgage
Preparing for a mortgage can be overwhelming at times, here are 10 tips to get help prepare you for the mortgage loan process.
1. Start with your credit report
The first move a lender makes when deciding whether you’re worthy of a mortgage is review your credit report. That means the first of 10 tips when preparing for a mortgage loan is to pull your credit report (we offer a list of free credit score sites) and review factors that affect it.
2. Get things in order
When you reviewed your credit report, did you notice a high debt-to-income ratio? Any Inaccuracies with the three credit bureaus? If you see any inaccurate information on your report (accounts you didn’t open, addresses that are yours) then you need to act promptly and immediately to resolve these problems.
3. Research loans, rates, and brokers
It’s vital to know what mortgage loan is best for your unique situation, the rates that you can afford, and of course, a broker that works well for and with you. The best way to find which loan is best for you is to speak with an experienced loan officer.
4. Be realistic about what you can afford
After researching loans and rates, and working with a broker, you will have a good idea of what you can afford. If you’re looking at a rate that requires a 20% down payment, but you’re not quite there yet – it’s time to refigure your rates based on something you can afford.
5. Understand how lenders operate
Lenders rely on the facts from your credit report and score. The higher your score is, the more they will trust you with a loan, and the easier it will be to get a better mortgage rate.
6. Decide how you’ll finance it
There are several ways to finance a mortgage – 15 years, 30 years, fixed rate, adjustable rate – after doing your research find what works best for your situation.
7. The larger your down payment, the wider your options
The more money you put down upfront, the better your terms will be. Again, be realistic about what you can afford.
8. Check on pre-payment penalties
Did you know you can actually be penalized for paying off a mortgage early? Yes! When you obtain a mortgage see if this is a stipulation for your situation.
9. Take a targeted approach to mortgage applications
If you’re going to apply for a loan, it’s going to show as a hard inquiry on your credit report and temporarily lower your score. Take this opportunity to apply for several mortgages in a 45 day timeframe – it will NOT hurt your credit during those 45 days.
10. “Not now” doesn’t mean “never”
Some people will not qualify for a mortgage loan. If this happens to you, don’t worry! There are plenty of tips and tricks to help fix your financial situation and credit score.
Applying for a mortgage is an undeniable step in the homebuying process. It’s important to prepare yourself so that you’re a good candidate for the ideal loan that fits your wants and needs.
What should you not do before applying for a mortgage? And how can you increase your chances of getting a mortgage?
Don’t forget to check your credit, don’t rack up debt, and don’t forget to pay your bills.
If you currently can’t afford a house because of a poor credit score, then you want to prepare as much as possible. Just because you don’t qualify now does not mean you will never be able to qualify.
All you have to do is learn how to optimize your credit score and improve your financial resume. Let Loan Compass coach you through the home buying process by following our easy to follow steps and tools that will save you money on your home.
Schedule a consultation to learn more about the mortgage loan process and how you can fast track your finances to become a homeowner.