What to Do Before Applying for a Mortgage Loan
Getting Ready to Buy Your First Home
If you are considering applying for a mortgage loan, I will suggest that you take your time. Don’t rush into it so that your application will not be rejected. One thing you should understand is that, each time you apply for mortgage loan, the lender will place hard inquiry on your credit file. And this has the tendency of lowering your credit score by few points. And if you keep applying after your application has been declined, you may end up hurting your own credit score the more unknowingly. So, before applying for a mortgage loan, it is important that you address certain fundamental issues which I am going to discuss in this article. These are highlighted below:
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Do These Things Before Applying for a Mortgage
- Check your credit score: You should not assume what your credit score is. It is possible you checked your credit score few months back. But you need to understand that your credit score is not static. It will keep changing based on the credit information being reported about you to the credit bureaus. So, you should endeavour to check your credit score on a regular basis at least once in a month. Checking your own credit does not affect your credit score in any way. Some credit card companies offer this as a free service to their customers. This will help you know where you are standing per time. Besides checking your credit score, it will be nice that you request for your credit report before applying for a mortgage loan. Your credit score may not be a true representation of your creditworthiness if there are errors in your credit reports. It is also possible to have two credit scores at the same time. If the three major credit bureaus don’t have the same credit information about you, you will discover that your credit score from the three credit bureaus will be different. To make it more confusing, the credit rating agencies may use different scoring model. But if you have your credit report from the three credit bureaus, you can easily compare the reports to see if there are errors or omissions. Omissions usually occur as your lenders may not report all your credit transactions to the three credit bureaus. Lenders are not under compulsion to report your credit to all the three credit bureaus. If you want to get your credit report, it is better to apply for it from the three credit bureaus at the same time. This will make the comparison of the three credit reports meaningful. If there are errors in the report, you should follow it up to ensure that they are corrected. This alone can help boost your credit score by few points. Note that you can get your free credit report from the three credit bureaus by applying to AnnualCreditReport.com. You are entitled to one free credit report from each of the three credit bureaus once in every twelve months. So, you should take advantage of this.
Read Also: How Credit Score Affects Your Mortgage Interest Rate
- Boost your income: I will say that you should not even bother applying for a mortgage loan if you don’t earn enough income that can sufficiently pay your monthly bills and at the same time will allow you pay your monthly mortgage payment. When it comes to applying for a mortgage loan, having an excellent credit score is not a guaranty that your application will be approved. You will need to prove to the lenders that you earn enough income so that they can be assured that you will be able to pay back the mortgage. The lender will like to see your recent pay slips and tax returns as proofs of your income.
- Build good work history: If you plan to apply for mortgage, it is not the time to start junketing from one job to the other. It is not enough to have worked for several years. Lenders like to see that you have a very stable job. If you’ve just changed your job, you may need to wait for a period of twelve months before considering applying for a mortgage.
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- Save enough money: If you have not been saving before, you should start putting aside part of your income now. You need to have enough money in your savings account which you can use for making your down payment. Depending on the type of mortgage you want to borrow, you will need to pay between 3.5% and 20% of the value of the home you want to buy as down payment. Also, you will need to pay for closing costs before the mortgage can be released to you. However, somebody can help you pay the closing costs as long as you will not be required to pay back the money. That is, the money should be a gift and not a loan. The person paying your closing costs on your behalf may need to convince the lender that the money is not a loan. You also need to have some cash set aside as reserves which you can use for your initial two or three month mortgage payments. Part of expenses that you will need to pay for is the moving costs. First time homebuyers usually overlook this. You should not forget that you still need to have some amount saved in your emergency savings account. This will ensure that you will be able to pay any unplanned bills such as medical bills and repairs when the needs arise. You will not need to miss your mortgage payment in case of any emergency situation.
- Create a budget: Don’t wait till the time you have collected your mortgage before you start planning on how to make your monthly payment. Before you even apply for the mortgage, you should accommodate your monthly mortgage payment in your budget. If your budget can’t accommodate the monthly payment, it may be a sign that you are not ready for the mortgage. As a rule of thumb, your monthly payment should not exceed twenty eight percent of your monthly income.
- Cut down other debts: If you have other debts, you should try as much as possible to pay significant part of the debts before you apply for the mortgage. Lenders will like to check your debt-to-income ratio so as to be sure that you are not overburdened with debt already. If your debt to income ratio is above the norm, no lender will approve your mortgage application. Lenders will not expect the portion of your income that will be channelled to paying revolving debts to be more than 36%.
- Manage your accounts responsibly: You need to be told that mortgage lenders will like to request for your bank statements. Therefore, you should avoid transactions that may portray that you are not responsible or prudent in managing your finance. Activities such as gambling and betting especially if they occur frequently or they involve large amounts may suggest that you are reckless in spending. Also, bounced checks may indicate that you cannot coordinate your finance very well. Your bank statements may reveal your lifestyles to the lenders. From the statements, they may get to know about your spending habits whether you are living within your means. Also, if there is any large deposit into your account which is not related to your job, this may call for questioning. If there are things you will not like to show up in your bank statements, this is the right time for you to avoid such. By the time the statements are made available to the lenders, it will be too late to correct or eliminate any transaction from the statements.
Read Also: Why You Should Not Miss Your Mortgage Payments
- Start researching your local housing market: While you are still waiting to apply for the mortgage, you may start researching about the housing market. You should understand the value of the type of home you want to buy as well as the interest rate trend. Your knowledge about the current mortgage rates may help you to decide whether you should choose Adjustable Rate Mortgage (ARM) or Fixed Rate Mortgage.
- Defer major purchases: Some people are able to get pre-approval for their mortgage but this is not the same as the final approval. If you make any major purchase that is capable of lowering your savings or increasing your debts, your application for the mortgage may be declined at last. That is why it may be better that you defer all major purchases until after your mortgage loan has been released to you.