The mortgage process can be overwhelming and confusing, especially if you are going through it for the first time. There is a ton of paperwork and the terminology can seem like a foreign language. There are several steps that all borrowers can follow to make getting a mortgage more manageable. Knowing what to do before you apply for a mortgage can improve your ability to get approved, save you money, speed-up the process and save you a significant amount of frustration. Making informed decisions benefits you in the near term when your loan closes but also over the long run because you have selected the mortgage and program that best meet your needs.
Doing things like organizing your personal and financing documents, checking your credit score, comparing loan quotes and getting pre-approved can all position you for success when you apply for your loan. Budgeting for closing costs, getting a mortgage that you can afford and understanding how your loan program works all set you up for the long term and help you avoid unpleasant surprises down the road. For example, it is equally important that you feel comfortable making your monthly payment when your loan closes and also understanding if your payment could increase in the future, which could happen with an adjustable rate mortgage (ARM) or interest only loan.
Below, we outline the top mortgage do’s including what to do before you apply for a mortgage. As illustrated by the list, there are no shortcuts but following these steps should help you qualify for your loan, save you time and money and ensure that you find the mortgage that is right for you.
One of the first things you should do if you are thinking about getting a mortgage is check your credit report and credit score. Your credit score is one of the most important factors in determining your mortgage rate -- the higher your score, the lower your interest rate and vice versa. Most mortgage programs, including no and low down payment programs, also apply a minimum credit score. Additionally, adverse items on your credit report can impact your ability to qualify for the loan. You may need to resolve items such as late payments, accounts in collection or other negative credit events as a condition for the lender to approve your loan.
Review the Credit Score Required for a Mortgage
Checking your credit score six months to a year before you apply for a mortgage enables you to identify and address any issues you find. Also, if your score is not as high as you want it to be, you have some time to improve it before you apply for the loan. A high score and a clean credit profile go a long way when you apply so checking your score ahead of time is definitely a mortgage do.
Simply put, comparing mortgage quotes from multiple lenders is the best way to save money on your loan. Even a small reduction in your interest rate can produce thousands of dollars in savings over the life of your loan. Comparing mortgage quotes can also save you money on your closing costs. Most people shop around for other major purchases such as a car and the same holds true for mortgages. Only with mortgages, because of the way interest is calculated, the potential savings realized by finding the best loan terms can be even greater. We recommend that borrowers compare at least five lenders and negotiate with lenders to get the lowest mortgage rate and closing costs. Contact multiple lenders in the table below to shop for your mortgage.
Some people are concerned that getting quotes from several lenders can hurt your credit score because each lender pulls your credit report. In reality, it is definitely possible to get a quote without the lender pulling your report and potentially hurting your credit score. So in short, there is no reason to not shop multiple lenders, especially when it can save you so much money.
Learn How to Get a Mortgage Quote Without Hurting Your Credit Score
Getting pre-approved for your mortgage offers significant benefits including increased certainty that your loan will close. If you are buying a home, being pre-approved makes you more attractive to property sellers because there is less financing risk. This can provide a definite advantage, especially in a competitive situation where multiple people are bidding on a property. Getting pre-approved also enables you to identify and resolve any issues with your loan application before you officially apply for your mortgage. Plus, getting pre-approved for is free and there is no obligation to ultimately work with that lender if you find better loan terms elsewhere. Our get pre-approved simplifies the process and enables you to compare loan terms from multiple lenders.
Applying for a mortgage involves a lot of forms and documents so it is very helpful to organize your personal paperwork before you contact lenders about a loan. Most lenders request copies of your pay stubs (two months), tax returns (two years), W-2s (two years), bank statements (two months) as wells as current statements for any outstanding debts such as auto, credit card and student loans. Having these documents readily available can significantly speed up the mortgage application process. Getting organized early also enables you to identify any missing documents or correct any errors you find.
Review Mortgage Document Checklist
This is another very important mortgage do. One of the biggest mistakes borrowers make is to get a mortgage or buy a home that they cannot afford. You may ask how a lender could approve you for a loan that is beyond your means but it happens more than you would think. Just because a lender qualifies you for a specific mortgage amount does not mean that is the right loan for you.
Use our Mortgage Qualification Calculator to determine what size mortgage you can afford
You should always make sure that the the monthly payment as well as all of the other expenses associated with owning a home such as property tax and homeowners insurance fit within your monthly budget and lifestyle. Your financial comfort level and confidence in your ability to afford the mortgage are more important that the loan amount you qualify for according to the lender’s debt-to-income ratio guideline.
It is also very important to understand how your mortgage works. This relatively easy with a fixed rate loan because your monthly payment and interest rate do not change. Other loan programs, such as an adjustable rate mortgage (ARM) or interest only loan, are not as simple and your payment and mortgage rate may increase -- potentially substantially -- over the course of your loan. This can create payment shock for borrowers and cause significant financial hardship. A lower initial monthly payment may make a mortgage more affordable in the near term but may also come with much more risk in the long term. Be sure to understand the mortgage program you select and if your payment can change as this can help you avoid challenges down the road.
Affording your mortgage is one thing but you should also keep in mind closing costs as they can run thousands of dollars. In many cases, borrowers can afford the monthly payment but they lack the funds to pay for closing costs, which prevents them from qualifying for the loan. Closing costs vary depending on the loan amount, property value, lender and loan program. While there are steps you can take to reduce your closing costs, they can catch you off guard. Depending on the lender and program, you may also need to hold savings in reserve when your loan closes, which requires additional funds. You should be sure to budget for closing costs and potentially reserves when you apply for a mortgage.
Understand How Much Are Mortgage Closing Costs?
“How do I find the best loan available when I’m shopping for a home mortgage loan?” CFPB. Consumer Financial Protection Bureau, July 28 2017. Web.