Buying a home, no matter what market we're in, can be a very stressful endeavor. Not only can searching for the right home be a challenge, but the process of getting approved for a home loan can be so daunting that it's enough to keep potential borrowers away from even thinking of buying a home. The good news is that with a little bit of preparation and organization, you can be well on your way to getting that loan you need to close on your new home. To increase your chances of success, there are 10 things you absolutely need to do before you apply for a mortgage.
1. CHECK YOUR CREDIT AND CLEAN IT UP.
In today's credit crunch environment, your credit score and what shows up in your credit report will be a crucial factor to a lender in determining their risk in giving you a loan. The lower your credit score, the higher risk you are to the lender. But don't get discouraged if your credit happens to be less than stellar. This is extremely important - you have the ability to improve your credit score way before you apply for a loan. Why wait until you get in front of a lender only to get rejected because of something you could have controlled? Be proactive!
The very first thing you need to do is get a copy of your credit report. Everyone is entitled to get a free credit report once a year so if you haven't gotten yours for the year, go get it. Be mindful of what you sign up for when you get your free copy. There are services out there that will charge you a monthly membership fee unless you cancel within a certain period of time. Although the monthly monitoring of your credit can be helpful, sometimes they sneak it in before you've had a chance to think about what you're actually signing up for.
Once you retrieve your credit report, you'll need to go through the report with a fine tooth comb. Sometimes, it may be helpful to work with a credit counselor, or even a credit repair agency. They can help you clean up your report by getting the credit agency to correct any errors. The reason why it's so important to check your credit report and credit score is because this could mean the difference between qualifying for a home or getting completely slapped in the face with rejection. Even if you were able to qualify for a loan with a less than stellar credit, you'll be paying for it big time with high interest rates (not to mention mortgaging your arm and a leg). This could cost you tens (or hundreds) of thousands of dollars.
Go clean up your credit report. Do whatever you can to get the highest credit score possible. You need to do this before you even look for a house because it could take up to 90 days to get changes made to your credit report.
2. MAKE SURE YOU HAVE ADEQUATE LIQUID FUNDS IN YOUR ACCOUNT FOR A DOWNPAYMENT AND RESERVES.
Most lenders will require you to verify that you have liquid cash that will satisfy the down payment as well as up to 6 months reserve for the monthly housing payment. They'll usually ask you for the last 2 months of bank statements or a verification of deposit from your bank. So, if you want to buy a house in August, make sure your funds are available by the end of May. If your funds happen to show up within two months of your loan application, you'll have to verify where it came from. Depending on where the money came from, this could be viewed negatively by the lender. For example, if you had to borrow the down payment, the lender will consider this as additional debt that will affect your debt to income ratio. The more debt you have, the less income you have to make the mortgage payment. Can you see why the lender would be weary of money suddenly showing up in your bank account? Get those funds in your account at least 3 months prior to your loan application.
3. DETERMINE YOUR MONTHLY BUDGET AND HOW MUCH YOU CAN AFFORD FOR A MONTHLY HOUSING PAYMENT.
This is probably the second most important thing you need to do before you apply for a loan (the first being getting your credit report cleaned up). Only YOU can determine what amount you can afford to pay on a monthly basis for housing. Don't let anyone tell you that you can afford a home simply because the monthly mortgage is X percentage of your income. That's ludicrous and you would be hurting yourself if you listened to this arbitrary nonsense. It's one of the reasons why so many people are facing foreclosure and bankruptcy today. They never sat down to determine exactly what they can realistically afford as a monthly payment. Sit down, add up all your expenses (include fixed, variable and contingencies/savings) and subtract the total from your monthly take-home income. Whatever is left over is conceivably what you may be able to afford as your total housing payment.
4. KNOW WHAT'S INCLUDED IN YOUR TOTAL HOUSING PAYMENT.
Your total monthly housing payment is more than just the monthly mortgage. It should also include interest, taxes, insurance, utility costs, condo/HOA fees, maintenance/repair costs, and possibly special assessments. So if your budget is $2000 for a monthly housing payment, that means that all of the above mentioned expenses need to be included in this number. If you budgeted $2000 for your total monthly housing payment and your lender quoted you a monthly payment of $1950, it's highly likely that the quote only reflected principle and interest. If you add all the remaining expenses that go into the monthly housing budget, you'll find that the actual number is a lot more than $1950, putting you way over your budget. Save some financial heartache and do your math!
5. DON'T GET LURED INTO A LOAN JUST BECAUSE YOU WERE QUOTED A LOW INTEREST RATE.
This is really important. The interest rate that is quoted to you, especially before a loan application is actually completed, is rarely the rate that you'll be receiving when your loan closes. For instance, let's say that you go on the Internet and you obtain a quick quote from a potential lender simply by entering your loan amount, your general credit score, and the type of financing that you need. Never rely on that initial quote because it's not going to be the rate that you'll actually be paying. The only way an accurate rate can be quoted to you is if you complete a full loan application and the lender has the chance to review the application, review your credit score and report, locks in your rate in writing, and give you a commitment letter reflecting the terms of your loan.
Rather than focusing on what your interest rate will be, focus on what your monthly payment will be. Whatever that amount is, include that amount along with all the other expenses that make up your total housing payment. That's the number that you should look at to determine if a loan is right for you. Not the interest rate.
6. DETERMINE HOW LONG YOU PLAN TO LIVE IN YOUR NEW HOME.
Your answer to this question will affect what type of loan you should get and ultimately your monthly payment. For example, if you plan to live in your new home for only 3 years, it would not make sense to get a 30 year fixed mortgage. A better loan for you might be an interest only loan for a certain number of years, or maybe even an adjustable rate loan where the interest rate is fixed for a certain number of years and then adjusts subsequently. Knowing how long you'll live in your new home will also affect whether you should consider a loan with a prepayment penalty. If you're going to move in 3 years, make sure your loan won't penalize you if you sell your home within the prepayment penalty period. But if you plan on staying longer than the prepayment period, it might be worth the savings you would get for allowing that condition on your loan.
7. THINK ABOUT THE SIZE AND AGE OF THE HOME THAT YOU WANT TO BUY.
Why is this important? It's important because it will affect your monthly housing payment and overall finances. Older homes may require higher maintenance and repair costs. Bigger homes expend more energy and can drastically increase your utility budget. Homes with big yards will require maintenance that you may not think about if you've always lived in a condo. You get the drift. Take these considerations into account when you determine your total monthly housing payment. The more these costs cut into your budget, the less financing you'll be able to afford.
8. DETERMINE HOW MUCH DRIVING YOU'LL BE DOING.
Most homebuyers forget to consider this factor when they finance their home. With gas prices skyrocketing virtually on a daily basis, making this determination will be crucial to determining how much financing you can afford. The further you are away from work or from retail necessities like grocery stores, drug stores and schools, the more you'll have to drive. Don't forget to include transportation and gasoline in your budget.
9. GET YOUR FINANCIAL DOCUMENTS READY.
For most loans, you'll need some basic documents in order to get your loan application processed. These may include two years of federal tax returns (if self employed), current pay stub, W-2 forms for the previous 2 years, and asset and bank statements for the previous 2 months. The actual documents that you actually need to submit will depend on the type of loan you choose to use to finance your home. Stated income/stated asset loans will require much less documentation than full doc loans. The sooner you can turn these in to the lender, the faster they can approve your loan and get you to closing.
10. FIND AN EXPERIENCED MORTGAGE PROFESSIONAL.
No two borrowers are alike and your mortgage professional should treat you with the personal service that you deserve. Meet your mortgage professional in person or at the very least, have a good conversation with them over the phone. Don't hesitate to ask questions. Ask them about the loan process and how they keep you abreast of the progress. Ask them for a good faith estimate of all the costs and to go over with you the loan terms and monthly payment that you will be paying.
Purchasing a home, especially if it's your first one, can be scary, frustrating and stressful. But as long as you do your homework and know what to do to prepare yourself, you'll be on your way to making your goal of homeownership a wonderful reality. Best of luck to you and your search!
(C) 2008 Lauren Vo
REPUBLICATION NOTE: This article may be republished as long as all text including author credits and hyperlinks are fully intact and unedited.
