Buying a home is an exciting life step, but it’s important to be prepared and there are many things you need to do long before you apply for a mortgage or start looking at homes. Some tasks, like saving for a down payment and avoiding changes in your credit or employment are vital to getting approved for a mortgage loan and they must be considered long in advance of beginning the home buying process.
1. Check Your Credit Reports & Credit Score
You should check your credit reports annually, but it is especially important to check them before applying for a new credit account, like a mortgage loan. Read through each credit report carefully and make note of any discrepancies. Follow the directions from each credit bureau in order to dispute any errors and be sure to file a dispute with each bureau that has the error on their report. It is important to check your credit reports months in advance of applying for a mortgage in case you need to file disputes as this may take some time. Learn how to get your free annual credit reports here.
2. Calculate Your Debt-to-Income Ratio
Your debt-to-income ratio, or DTI, will be used by mortgage lenders in their approval process. Your DTI is the ratio of your total monthly debts to your monthly pre-tax income. Each lender may have a different limit on your DTI for approval and they may even be flexible on this requirement depending on other factors, like your down payment. You should keep in mind that when lenders calculate your DTI they will do so as if you are currently paying for a mortgage in order to see if you are likely to pay back the loan. If you find that your DTI is above several lenders’ requirements you will have to either pay off some of your debts or consider a smaller loan. Read more about calculating your debt-to-income ratio and how to use it to see how much house you can afford.
3. Avoid Changes In Credit & Employment
Mortgage lenders look at your credit reports in order to estimate how financially responsible you are. Moreover, it is a red flag if you apply for other credit accounts right before you apply for a mortgage or if you have any missed payments. Avoid any changes in your credit and be sure you are making all of your payments on time. Most lenders require that you are employed for 1-2 years at the same employer to get approved. So if you’re considering leaving your job, you should hold off until you close on your new home. If you’re self-employed, lenders will look more closely at your business’s finances to determine if you have a steady income from it and how stable the company is.
4. Save For Your Down Payment
This is something you need to think about possibly years before you apply for a mortgage. The amount of your down payment is a big factor in getting approved for the loan and how much you will be paying each month for the mortgage. For conventional loans, you will also have to pay for private mortgage insurance if you put a down payment less than 20% of the home’s purchase price.
5. Consider Your Home Needs & Wants
Before you start seeing homes, you should think about the features that are must-haves and the ones that would be nice to have but aren’t deal-breakers. Look at some listings online and consider your current living situation and the ways it could improve. Some must-haves are the number of rooms or bathrooms, driveway, backyard, updated kitchen and garage. Others may be more about the neighborhood and quality of the schools.
6. Research The Area & The Market
Location, location, location. A house isn’t everything - you need to consider the neighborhood and surrounding areas as these affect the crime rates, public schools and proximity to stores. Try to get a better idea of where you want to live and what cities and neighborhoods are right for you. You also should research the housing market in that area and in the state. If it’s a buyer’s market then that’s great for you, but if it’s a seller’s market consider waiting until the prices come down.
7. Comparison Shop For Mortgage Lenders
Just as you would comparison shop for cars and other significant purchases, you need to compare mortgage lenders. You will find that lenders will offer you different interest rates, closing times and some may simply be too difficult to work with. Contact several lenders online or in person and before they pull your credit they should be able to provide you with more information based on your credit score and other self-reported personal information (this is usually all that is needed to get pre-qualified). You will be dealing with your lender A LOT during this process so you want to be happy with the interest rate you’re getting (this can save you thousands of dollars) and the level of customer service. Different lenders may also have different lenders fees so keep that in mind when you are comparing.
8. Get Pre-Qualified For A Mortgage
Often the terms “pre-qualified” and “pre-approved” are used interchangeably, but they have different meanings in the mortgage process. You can get pre-qualified by a mortgage lender based on self-reported information such as your income, assets, debts and credit score. A pre-qualification letter can be used when you make an offer on a home and seller’s will know you are serious about the offer if you have this letter. Pre-approval is the next step when you have to provide all of the documents proving your financial information and this is usually after an offer is made on a home. Learn about the documents needed to get pre-approved for a mortgage.
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