The housing market is ever-changing. What worked a couple of years ago may not be the best way to go about making a major purchase decision such as acquiring a home. Among the many variables that cause the market situation to change, home inventory availability, mortgage financing options, and your personal budget and research are the major players.
Any home-buyer in 2020, therefore, needs to make decisions grounded on the most up-to-date information on the real estate market. They also need to be aware of the various mortgage loan deals and down payment assistance programs that are available to them.
Applying for a Mortgage
Since it deals with a large amount of cash, applying for a mortgage can be a nerve-wracking experience. Fortunately, there are things that you can do or keep in mind to make the process easier on you:
Review your credit reports
Before anything else, you’ll need to make sure that you look like an ideal borrower to a financial institution. In fact, your credit score plays a big part in whether you get a good deal on your home loan or not. In some cases, it can even determine if you will even be approved.
Pull your credit reports from reputable sources and review the records
You need to make sure there are no errors or mysterious accounts that you didn’t open floating around as it would damage your credit. If there are negative (but factual) items on the report, work on addressing before putting in the request for a loan.
Extra: Improve your credit score
Most conventional lenders consider loan applications from people with credit scores of 620-640 at the very least. Meanwhile, government-backed loans allow a credit score as low as 500, as long as the applicant meets other criteria. That’s the lowest they’ll entertain, though. You’ll still have a better chance of being approved if you have a higher credit score.
Here are some ways to raise your credit score and your chances of loan approval:
- Pay your debts on time and in full — your payment history accounts for 35% of your credit score, so make sure to keep track of your dues.
- Keep your current debt as slow as possible — another large contributing factor to your credit score (30%) is the amount of debt you owe vs. the total amount of credit extended to you. Improve your score by keeping debt low.
- Avoid making major credit purchases before applying — doing so negatively impacts the average length of your credit history. This also goes for opening new lines of credit.
Calculate your budget. Before you go house hunting, you’ll need to make sure that you can afford it. Find out where your finances place you using a debt-to-income ratio, which is the total amount of your gross monthly income that you will allocate to pay the debt each month.
You’ll want your mortgage debt-related expenses to stay under 28%. If you want to calculate your ratio with your other debt obligations, then see that you don’t go beyond 43% — but it would be better if you didn’t go over 36% at all.
Work on reducing or eliminating your existing debt altogether if your DTI is too high before applying for a mortgage to raise your chances of getting approved.
Decide on the mortgage type and shop around. There are several types of mortgage loans available to borrowers. It’s up to them to find the one that matches their needs and particular situation. Some factors to consider when choosing a mortgage loan are:
- Whether you want a conventional mortgage or a government-backed one
- If you want the reassuring steadiness of a fixed-rate mortgage or the less expensive variable-rate mortgage, which comes with the risk of an interest rate increase or two in the future based on the current market.
- If you want a short or longer payment term. Shorter terms tend to have higher premiums while longer ones, while less constricting on the budget will take more years to pay off.
Once you’ve determined which mortgage type is best for you, don’t go signing the first contract that you find that meets the requirements; shop around for other interest rate offers, inquire with other mortgage lenders, and do your due diligence. Patience will ensure you get the best deal around. Other considerations include:
- Closing costs
- Discount points
- Mortgage insurance
- Origination fees
- Other loan-related expenses
Gather the relevant paperwork. Your loan application process will go faster and more smoothly if you gather all the information and documents necessary beforehand. Here’s what you’ll need:
- Income verification — this will prove that your income is sufficient to support your mortgage payment terms. It covers: tax returns for the past two years and recent W-2 forms or pay stubs or 1099s/ profit-and-loss statements.
- Proof of alimony or child support — lenders will expect court orders, bank statements, and other legal documentation.
- Proof of assets — additional assets can help secure your mortgage. Prepare bank statements for your checking and savings accounts, retirement account, etc.
- List of liabilities — lenders will also want to know what else might be tied to your finances, so be ready with documentation on your outstanding debts (credit card balances and other existing loans).
Get pre-approved for the loan. A pending mortgage loan approval can be nerve-wracking — then you’ll have to go house hunting right after! Take most of the pressure off by getting pre-approved for the loan. You’ll be able to figure out what ballpark your loan would be at, and you’ll also have a competitive advantage from other homebuyers in the eyes of the seller because it shows that you have a better chance of securing the funds to make the sale.
