Most likely, if you are purchasing a home, you need a mortgage. We recommend you prepare for the mortgage process, even before you start looking at houses.
If you have a good credit score, a stable income, and savings in the bank, you will be able to secure mortgage preapproval quickly and proceed straight to the homebuying process. But if you have less-than-stellar credit, are self-employed, or have little cash to bring to the table, you’ll want to start the process way before you look at houses.
First, you need to get a copy of your credit report. Federal law allows you to get a free copy of your credit report every 12 months from each credit reporting company. Check this yearly to ensure that the information on all of your credit reports is correct and current. These reports will help you identify problems, but they won’t show you the same credit score your lender will see. That makes meeting with a lender (or two or three) at the start of the process crucial.
Get Your Paperwork in Order
Be prepared to produce documents, and lots of them, starting with several years of tax returns and many months of bank statements. Lenders will want proof of your income, and they will want to know about your debts. They also will want to know the source of any big deposits. If your parents give you money for a down payment, they will need to write a letter documenting that.
Start and Continue $aving
The other thing you’ll need is money. You’ll need money for your down payment, closing costs, and more than a year’s worth of taxes and insurance payments. Lenders will also want to see that you have adequate reserves in case you lose your job or you need major home repairs done.
There are different schools of thought about how much money you need for a down payment. While 20 percent is often considered a rule of thumb, you can buy a house with less with a Federal Housing Administration mortgage, or a conventional mortgage, or nothing down with a VA loan available to military veterans.
But the less you pay up front, the bigger your monthly payment will be. Plus, if your down payment is less than 20 percent of the purchase price, you’ll have to pay private mortgage insurance (PMI) or the FHA equivalent, known as mortgage insurance premium. You may also get a lower interest rate with a higher down.
More Tips on Preparing for a Mortgage:
Meet with a mortgage officer before looking at homes. This will help you determine whether you have credit problems that need to be solved first. It will also let you know how much house you can afford before you begin your search.
Pay off as much debt as you can. This will help keep what’s known as your debt-to-income ratio down. Lenders look at your income and all your debts – student loans, car payments, credit card debt – to determine how much you can afford to borrow. If your total debt, with the new house payment, would be more than 43 percent of your income, you’re unlikely to get the loan. Some lenders may want a lower ratio.
Show a solid work history.
Be prepared to document everything. You’ll need tax returns, bank statements, brokerage statements and documents to verify the source of any money you plan to use. The lender will also verify your employment and income, once at the beginning of the process and again a day or two before closing.
Don’t buy anything on credit, or apply for any credit while your loan is pending. You may be tempted to buy new furniture for your new home and put it on a credit card. Or, perhaps you realize you’ll have enough cash left for a down payment on a new car.
Talk to several lenders or mortgage brokers. Not all lenders offer the same loans, so it makes sense to shop around. Be careful that you’re comparing apples to apples.
Shop for closing agents. The actual closing costs, such as document preparation, legal fees, and title insurance, vary considerably. Ask both your real estate agent and mortgage officer for recommendations, as well as friends and family.
Make sure you have enough cash to cover all your costs. In addition to closing costs charged by the lender and the closing agent, you’ll need to pay for a home inspection, an appraisal, a survey and city, county or state transfer taxes. Not only that, most lenders ask for at least a year’s worth of homeowners’ insurance and property taxes upfront.