What you need to know
What this means is —now more than ever—you need to be qualified for a mortgage before you shop for real estate.
Understanding today’s mortgage market
the criteria banks use to determine whether to make a loan—is more stringent. That’s not to say that home buyers will have a difficult time getting a mortgage. But what it does mean is that proving to the bank that you’re financially prepared for a mortgage and is more important than ever.
What it takes to get approved for a mortgage
Before completing a mortgage application or even strolling through an open house, you’ll want to know these things
your monthly income
The sum of your total monthly
debt payments (auto loans, student loans and credit card minimum payments)
How much cash you can put down
How much house you can afford
And Most importantly Your credit scores
The first step in preparing to apply for a mortgage is to document your monthly income and payments. You’ll need to provide two weeks of pay stubs to your lender. Self-employed? Then expect the underwriting process to be more involved. You’ll have to submit documents like past tax returns to lenders which may count towards your average of your last two year’s of income or the lower of the two numbers.
Getting approved for the home is about staying within ratios lenders use to determine what you can afford for a home payment. Huge debt payments such as auto loans or student loans will limit the amount mortgage money you can get. If possible, pay these loans off or, at the very least below 30 percent of the debt on that account.
Credit health a checkup
Before applying, obtain your full credit report.
Verify there are no errors on the report or recent derogatory marks like missed or late pays. You should consider signing up for a credit monitoring service that provides regular credit monitoring.
As for your credit score, your FICO scores will need to be at least 680 and preferably over 700 to avoid finding a highly-qualified cosigner. We offer score improvement to get your scores above where they need to be to boost and improve your credit before getting mortgage approval. Remember, the lower your credit score, the higher the mortgage rate you’ll pay.
If your credit is just under 680, you may consider an FHA loan. These government-insured loans allow lower credit scores and much lower down payments, but there are significant additional costs.
Don’t apply for new credit not even a cellular device leading up to your mortgage application for a few months. Lenders get jumpy when you’re applying for too much or new credit. Your going to be making a major life changing purchase so, you don’t want your bank asking for explanation to recent inquires prior to your mortgage.
Know your mortgage budget
Before speaking with a loan officer, know how much house you can afford and are comfortable paying.
A good rule of thumb: your total mortgage payment with taxes, and insurance) should not be over 30 percent of your gross monthly income.
Example, earn $50,000 a year, your max payment would be $1,250 a month. That’s an absolute, max, however. I’d stick within a total payment of 25 percent of gross income.
It can be difficult to equate this monthly payment to a fixed home price, as your monthly housing payment is subject to variables like mortgage interest rate, property taxes, the cost of home insurance and private mortgage insurance (PMI), and any condo or association fees.
Figure out how much you can save for a down payment
Next, determine what you can save for a down payment to put towards your new home. Expect your mortgage lender to ask for am minimum of 10 percent down unless you’re getting an FHA loan.
If you have more use it, to avoid private mortgage insurance —high insurance that protects your mortgage lender should you foreclose before building up sufficient equity in the home.
Time to apply for your mortgage
Meet with a mortgage lender and get per-qualified which simply means the lender believes that, based on your credit and income, and other factors, you should be able to get approved for a mortgage. It’s informal and totally non-binding.
As you get closer to buying a home you’ll want to seek pre-approval. Meet with a local bank, credit union, or mortgage broker or online.
Wherever you go, this pre-approval isn’t binding, but it’s a formal(ish) indicator of your ability to get approved for a mortgage. Most sellers will want to see a pre-approval within a couple days of receiving your offer.
In closing, If you’re a prime candidate (good credit and income), a reputable mortgage lender should offer you their best rates right off the bat. But don’t be afraid to shop around. Check your credit report and scores for accuracy. Small can add up to big savings over the life of your loan. Once you know whats on your reports if yours scores are not sufficient reach back out to us and get a high-score boost, and stop dreaming of ownership, get in the home of you dreams! Happy home hunting.