When it comes to getting a mortgage, getting prepared can go a long way. There are several steps you should take before you submit your loan application that can improve your odds of being approved and also save you money on your loan. The mortgage process is complicated, long and usually confusing so the more effort and preparation you put in in advance, the better.
Because your credit score helps determine your interest rate and ability to qualify, knowing your score months before you apply is one of the best ways to prepare for getting a mortgage. This enables you to proactively address any negative items you find and potentially increase your score. The mortgage process also involves a ton of paperwork so organizing your finances and personal documents enables you to move quickly and be responsive to lender requests. Another important part of qualifying for a mortgage and buying a home is saving for your down payment. You may be able to afford the monthly mortgage payment but you also need to make sure you have sufficient funds for the down payment. Paying off or down debt can make saving for a down payment easier and also enables you to qualify for a larger loan amount. So there are multiple benefits to trimming your expenses before you apply for the loan.
Another key way to prepare for a mortgage is to develop multiple lender relationships. Establishing at least five lender contacts enables you to compare several quotes when you are ready to shop for a mortgage. Comparing proposals from different lenders helps ensure that you find the best loan terms including the lowest mortgage rate and closing costs. It is also a good idea to get pre-approved for your mortgage which makes the process go more efficiently when you submit your application. Plus, being pre-approved makes you a more attractive buyer to home sellers.
Below we review how to prepare to get a mortgage. Following these tips can save you time, money and a lot of hassle when you apply for your loan. In short, the most prepared and organized applicant usually saves the most money and closes their mortgage in the least amount of time.
Lenders typically require a lot of personal and financial documents to process and approve your mortgage. Lenders request documents to verify your employment, income, assets, financial position and tax history. Some of the items a lender may request include pay stubs, W-2 forms, tax returns, bank statements, investment account statements and current loan statements. Typically you are not asked to provide personal documents until later in the mortgage process but having these items organized at the beginning of the process makes things go much smoother and may even help you get pre-approved.
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Additionally, reviewing your personal finances in advance of the mortgage process helps you identify and resolve potential issues such as missing documents or errors you may find. This enables you avoid potential delays and ensure that your loan is processed as quickly as possible.
One of the most important inputs in the mortgage process is your credit score so it is very important that you know your score before you start the process. In short, your credit score provides an indication of how likely you are to pay back the loan and lenders focus on it when determining your ability to qualify for a mortgage and what interest rate you will pay. A higher credit score means that lenders are more willing to lend you money and offer you their lowest rate. A lower credit score means that lenders are less willing to lend you money and charge you a higher mortgage rate if they do.
It is important that you understand your credit score and address any potential credit issues well before you apply for a mortgage. We recommend that you review your credit score six months to a year before you apply. A common question is, does it hurt my credit score when I check my cscore multiple times and the answer is no. You can use services such as annualcreditreport, CreditKarma or credit.com to check your credit score on a weekly or monthly basis without negatively affecting it.
Understand the Credit Score Required for a Mortgage
By reviewing your score months before you apply for a mortgage you can take positive steps to improve your credit profile such as addressing unknown late payments or potentially reducing your credit card balances. Being proactive about your credit profile helps you avoid negative surprises later in the process, qualify for a mortgage and receive the lowest interest rate offered by a lender.
One of the best steps you can take prior to applying for a mortgage is to pay-off or reduce your monthly debt. Examples of monthly debt include credit cards, auto and student loans as well as alimony and child support, if applicable. When lenders evaluate a borrower’s ability to qualify for a mortgage they review debt-to-income ratios, or the borrower’s monthly debt expense (including total monthly housing expense) as compared to the borrower’s gross income. You may make a lot of money but if you have too much monthly debt your debt-to-income ratio may be too high and you may not be able to qualify for the mortgage.
Additionally, the less monthly debt you have, the lower your debt-to-income ratio and the larger the mortgage you can afford. So if you are thinking about getting a mortgage within a year, paying off or paying down your monthly debt can help ensure that you qualify and potentially increase your loan amount. Reducing your debt can also improve your credit score which is beneficial when you apply for a mortgage.
Use our MORTGAGE QUALIFICATION CALCULATOR to determine what size loan you qualify for based on your monthly gross income and debt expense
It is important to note that you do not need to pay-off all of your debt and saving for your down payment is also important. Lenders typically require that borrowers make a down payment of at least 20% of the property purchase price to receive the lowest mortgage rate, although it is certainly possible to buy a home with a down payment of less than 20%. It is also important to keep sufficient funds in reserve to be in a position to absorb unexpected financial challenges after your loan closes.
Review What Size Down Payment Do I Need to Buy a Home?
One of the best ways to make sure you get the best terms for your mortgage is to compare proposals from multiple lenders so it makes sense to develop relationships with several lenders several months before you apply. In many cases you may have a friend who is a lender or your real estate agent may recommend a lender or you use the bank where you have your checking or savings account. When you select a lender without comparing mortgage proposals from at least five lenders you could end up paying a higher interest rate or closing costs, which means you are wasting money.
It is important to understand that there are different types of lenders such as banks, mortgage brokers, mortgage bankers and credit unions and they are all competing for your business. We recommend that you compare proposals from at least five lenders, including one mortgage broker, to make sure that you are getting the loan with the lowest interest rate and fees. This approach also ensures that you have a range of mortgage options, which puts you in a stronger position when you negotiate loan terms.
Developing lender relationships well in advance of applying also allows you to understand lender qualification requirements and underwriting guidelines which positions you to get approved for your loan more quickly. Additionally, although you develop relationships with multiple lenders it is important to keep in mind that you only select one lender for your mortgage. Just because you receive a quote from a lender does not mean that you are obligated to work with that lender.
The table below compares mortgage rates and fees for leading lenders in your area. We recommend that you contact multiple lenders to review loan terms and qualification guidelines.
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Getting pre-approved for a mortgage demonstrates your ability to qualify for a certain loan amount prior to making an offer to purchase a property. This gives you a big advantage when you are attempting to buy a home because you have removed one of the biggest risks from the process – your inability to obtain financing. The pre-approval process focuses on borrower qualification, what size loan you can afford and your ability to make the monthly payment and pay back the loan over time.
Review Reasons to Get Pre-Approved
Getting pre-approved typically requires you to provide certain personal and financial information to a lender although some lenders may require that you submit a loan application. The lender may provide a letter or online certificate outlining what size mortgage you are pre-approved for as well as any conditions.
It is important to emphasize that just because you are pre-approved by a lender does not obligate you to work with that lender to finalize your mortgage. When you shop for a mortgage, you may find a lender that offers better terms and you are free to work with that lender. Understanding your lender options and getting pre-approved in advance of the home search process better positions you to successfully buy a home. You can use our free get pre-approved form to compare loan terms and get approved by leading lenders.
“Preparing to shop for your mortgage.” CFPB. Consumer Financial Protection Bureau, 2017. Web.