10 things to do before applying for a mortgage
I wrote not long ago that you should shop for a mortgage before trying to find a property to buy because until you have a lot of money, you will want a mortgage.
Now let’s talk about what you should do before applying for a home loan to avoid widespread setbacks that would effectively set you back.
Preparation is paramount when it comes to obtaining a home mortgage. And you don’t get a second chance to make a first impression, either.
Get these details right the first time and your mortgage experience will be that much smoother.
1. Rent a place first
While it might seem like a no-brainer, renting before you buy a home or condo is a great move for a few different reasons.
For one, it will introduce you first-hand to what it takes to be a homeowner. If things break or fail during your rental, you can usually call the property management company or landlord for help.
Once it’s your personal place, you’ll either fix it yourself or pay out of your personal pocket to have them help you.
Also, if you lease first, you’ll be less likely to experience a rate dump, which is when your monthly housing funds skyrocket exponentially.
Mortgage lenders like candidates who have shown in the past that they will deal with giant housing funds to make sure they don’t default for that very reason.
Therefore, renting will make both of you more educated homeowners and better candidates for a mortgage.
That said, it’s completely acceptable to stay in your parent’s house before applying for a mortgage too, at least to qualify.
2. Test your credit score and reviews
The most cliché recommendation ever. Sure, however, there is a cause. It is very, very essential, if not the most important aspect of home mortgage approval.
You also spend some time fixing credit-related issues, so it’s not a last minute exercise if you want to be successful.
Lately, it’s also very easy to check your credit scores and reviews for free, thanks to services like Credit score Karma or Credit score Sesame. Many banks and bank card issuers also offer free credit scores.
Simply taking the time to sign up and monitor your credit score can make or break you when it comes time to use a mortgage.
You could also save a ton of cash, as higher credit scores are often rewarded with lower mortgage rates, which equates to reduced monthly funds and a lot of curiosity saved.
In case your scores aren’t all that great, fix the issues instantly so you’ll be in great shape (780+ FICO) when it’s time to use.
3. Pay your money owed
Similarly, realizing how good the debt you’ve bought is, along with the corresponding minimum funds, can play a big role in getting approved for a mortgage.
Simply put, the less debt you’ve bought, the more you’ll be able to pay on your given salary, all else being equal.
It can be beneficial for everyone to pay off debt early on a home loan because it will increase your buying energy and probably improve your credit score at the same time.
The end result could also be much more buying energy due to a decrease in the price of the mortgage, which reduces funds and will increase affordability.
To find out how much debt you have, take a copy of your credit report and add up all the monthly minimum funds.
All of these reduce your affordability, so eliminating them or reducing balances will help allocate extra money toward a potential mortgage.
4. Put the Spend on Maintenance
Staying in the realm of credit rating, avoiding mindless swiping (or now dipping/tapping) weeks and months before applying for a home loan can have a big impact.
First of all, your credit scores may drop due to higher bank card debt. It would be foolish to make a small or medium purchase that would jeopardize your very large home purchase.
Second, the new debt could affect your DTI ratio, thus limiting what you can afford, even if you pay off your bank cards in full each month.
In other words, it would be better to simply wait and make your purchases a month later, once your mortgage is funded.
That’s true during the home mortgage process, too: Don’t go buying the furniture until the mortgage crosses the finish line. Make sure the ink is dry!
5. Organize your property
Now let’s handle property, which is a detailed second to credit score in terms of importance.
After all, you’ll need them in your initial fee, closing prices, and reserves, the last of which shows the lender that you’ve bought cash to spare, or a cushion if circumstances change.
But surely it is one thing to have these funds and another to doc them.
Typically, you are required to provide your last two months of statements from the financial institution to provide the lender with a sample of your savings.
To make life easier, it might be prudent to deposit all required funds into a single account more than two months before the utility.
That means money could be seasoned and there will be no need for letters of justification if cash is constantly coming in and out of the account.
The best situation might be a savings account with all the funds required to close and little or no exercise in the reported account during the previous 90 days.
6. Consider any purple flag
Asset points are sometimes pink flags for mortgage underwriters. They hate seeing the money just deposited into their account as they will have to provide it and then decide if it is depleted.
The same goes for today’s giant deposits. They should know it’s their cash and never a gift or a mortgage from someone else because technically it wouldn’t be his cash.
Try to think like an insurer here. Make sure the assets are in your personal account (not your partner’s or your parents’) well in advance and that it is reasonable based on what you do for a living/earn.
Also take a look at your employment history. Have you ever been in the same job or line of work for at least two years, is it stable, are there any current changes?
Anything strange happening with any of your finances? In that case, handle it yourself before the lender does. Resolve all issues before giving the subscriber your file keys.
And don’t be afraid to get pre-qualified or pre-approved just to see where you stand. You can have an expert look for free with no obligation to use them when it really applies.
7. Solve a Mortgage Sort Yourself
I see it often: A mortgage broker or mortgage broker will put a borrower in a certain type of mortgage without asking much what they want.
Not everyone needs or wants a 30-year mortgage, although it is by far the most preferred mortgage program on the market.
An adjustable-rate mortgage might work for you, or maybe a 15-year mortgage is the better move. The same goes for the FHA vs. standard mortgage.
No matter what it is, do the analysis yourself before events get involved.
This ensures that you are dealing with additional targeting, and never just blind, generic or biased.
8. Think about how long you will be in the house
Along with those same stresses, try to decide on your early term ahead of time.
If you have a good suggestion for how long you will have the property, it can be instrumental in your mortgage selection.
For example, if you’re just buying a starter home and have fairly solid plans to move in five years or less, a 5/1 adjustable-rate mortgage might be a better option than a 30-year mortgage.
You could save a ton of cash, some of which could go toward a down payment on your moving property.
Conversely, if you’re considering living forever, it might make sense to get eternal financing through a fixed-rate product.
And also pay mortgage factors for a lower price you’ll enjoy for years to come.
Take the factor query positively in a meaningful way. Those who sell or refinance soon after buying for you can lose a lot of cash on the desk.
9. Perceiving Mortgage Charges
This drives me crazy. Everyone just announces interest rates without explaining them. Where do you get them? Why are they totally different? Why are they transferred up and down?
These are all essential questions for which you must have the solutions. Sure, you don’t have to be a professional because it can be quite difficult, but a basic understanding is a must.
This will affect the type of mortgage you choose, whether you decide to lock in the price of your mortgage, and whether you’ll pay low-cost factors.
If you’re simply evaluating fees from different lenders, you may want to take the time to better understand the basics when you’re at it.
This will also help with negotiation fees, as an informed borrower who knows mortgage jargon may have more time to file a case if they feel they are being overcharged.
10. Test reviews, get referrals and shop rounds
Lastly, learn about lenders up front, not after you use them.
It’s much more durable to buy when you’ve used it, since you won’t have to “lose your house in line.”
You can also lose your deposit if a lender prepays you and you go elsewhere.
It’s a lot harder to even bother using another place when you’ve given someone all your financial details and signed a bunch of statements.
Every time you buy a TV or a car, or maybe a toaster, chances are you spend a fair amount of time researching and comparing prices.
You don’t just show up at Best Buy or the car lot and buy something that day.
With a mortgage, it’s much more important to put in time because it’s such a great value, and one that stays with you much longer. Push yourself 360 more months.
If you make mistakes or fail to buy a larger stock, it will hurt month after month, not just once.
Keep in mind that realtors influence lender selection for nearly half of homeowners. Wouldn’t you make that selection a bit yourself?
(photo: Javi Sánchez de la viña)