How to Get Prepared for a Mortgage Application
Buying a house in Lakeland can be an exciting time if you are prepared and know what you are doing. And right now the housing market is on fire!
Are you ready for a new chapter in your life?
Think about that again…
Are you REALLY ready to take the leap into homeownership?
Don’t worry, it’s not hard, but you do have to think ahead and get your financial house in order before you begin. The preparation process can take some time, so be patient, sit back, relax, get your popcorn ready, and let the ride begin.
13 Fast Track Tips You Can Use to Prepare for a Mortgage Application
1. Come up with a Plan of Action
OK, so you’ve decided to go ahead and buy a house…that’s great! But before you do anything else, you really need to sit down and come up with a plan of action. You can’t just jump into this without thinking it through first. Obviously, you need to pre-prepare for the process and that’s what this article will be about. However, before you do that, there are a few things you need to think about and consider before you proceed.
- Are you really (honestly) ready to buy a house?
- How much money do you have saved?
- Do you have enough money to cover any unexpected expenses should they arise after you’ve moved into your new home?
- Have you thought about what size house you are going to need, which should include your current needs and your future needs so you can buy a house you can grow into?
Now that you’ve given this process some thought, it’s time to put together your plan of action. It’s easier for most people to make a checklist of things they are going to need to do. Buying a house is an extensive process and if you don’t have a checklist to follow, it’s easy to get off track or forget critical issues and deadlines. So don’t skip this step. Work with your real estate agent on this to make sure you aren’t missing anything.
2. Pull Your Credit Reports
You will need to pull all three of your credit reports and review them for accuracy. Each mistake, no matter how small or insignificant you think it is could cost you when it comes time for the mortgage company to assign you an interest rate.
You can go to Annualcreditreport.com to pull your credit reports. This website is the only source for free credit reports that are actually authorized by Federal law.
3. Fix Any Credit Report Mistakes or Inaccuracies You Find
If you find any mistakes or inaccuracies on your credit reports, you will need to contact the agency where the mistake was found and ask them to correct those errors.
Here are the dispute links to all three credit reporting agencies:
4. What You Need To Know About Your Credit When Buying a Home
Having credit and understanding your credit score (this is another whole topic in itself) can be tricky. So let’s talk about the things you should and shouldn’t do when you are trying to buy a home, whether that be now or in the near future.
- You will need two to three credit tradelines to buy a house
A conventional loan will require you to have three tradelines, which could be a combination of credit cards, car loans, student loans, etc. that have been active within the last 12 to 24 months. An FHA loan will require that you have two active tradelines. If you don’t, you probably will not qualify for a home loan.
- Don’t close older lines of credit
Your older credit will raise your credit score even if you don’t use it very often. Therefore, it’s not a good idea to close your older lines of credit. You will simply need to use that credit periodically and pay the balances in full each month. This is enough to keep them active.
- Pay down your debt
Lenders require that your total debt not be more than 36% of your gross income. Therefore, if you have debt that’s higher than 36% of your gross income, you will need to pay that down before applying for a mortgage.
- Don’t open any new lines of credit
Don’t open any new lines of credit at least six months before you apply for a mortgage loan. Doing so will lower your credit score and could cause you to receive a higher interest rate.
- Don’t buy anything on credit
Prior to applying for a mortgage loan and even if you are in escrow, don’t go out and buy anything on credit. Yes, it’s exciting and we know you can’t wait to buy things for your new house. However, increasing your debt utilization ratio before closing could disqualify your loan.
- Don’t move your money around
To buy a home, you will have to show several months worth of bank statements (checking and savings). If the lender sees that you moved a large amount of money around, you are going to have to prove why, which is a hassle. Therefore, it’s best to leave your money in their respective accounts for at least three months prior to buying your home.
5. What Is a FICO Score?
A FICO score is essentially your credit score. One of the main determining factors in approving a mortgage loan and determining what your interest rate will be is your FICO score. So it’s best to do everything you can to raise your credit score before you apply for a mortgage loan.
There are different industry scoring models of FICO scores. Some models range from 300 to 850 and others from 250 to 900. Here are the Base FICO Scores called the FICO Score 8 credit-scoring model.
- Poor – 300-559
- Fair – 580-669
- Good – 670-739
- Very Good – 740-799
- Excellent – 800-850
Knowing your FICO score will give you a general idea about whether your mortgage loan application has a chance of being approved or not. However, with that being said, sometimes miracles happen even with not so great credit. So it’s worth trying because there’s always a possibility any given lender out there could say yes! If you contact a real estate agent and explain your situation, he/she can give you a better idea of what your chances of approval are based on their experience when it comes to dealing with mortgage lenders.
6. Assessing Your Debt-To-Income Ratio (DTI)
For the best mortgage rate and lender, you will need the lowest possible DTI or be prepared to put more money down. Your DTI is all your monthly debt payments divided by your gross monthly income. Most lenders have what they call a 28/36 rule which means your mortgage loan can’t be more than 28% of your gross income. And, your total revolving debt payments can’t be more than 36% of your gross income. There are some lenders who allow a 43% (sometimes more) DTI in some circumstances.
7. How Much Down Payment Can You Afford?
The more money you put down on your house the lower the interest rate will be. A 30-year fixed-rate FHA loan requires a down payment of 3.5%. A conventional mortgage loan requires a 20% down payment. However, in some states such as Florida lenders have stricter standards due to past projects that have gone bankrupt and, therefore, could require more of a down payment depending on your circumstances.
IMPORTANT NOTE: Some potential homebuyers don’t realize that a lender won’t allow you to pay for your down payment with a credit card or any other type of loan. In fact, when you submit your down payment, you will have to prove the money wasn’t borrowed. Additionally, if a lender sees a large amount of money show up in your account, you will have to show proof of where that money came from.
The good news is that lenders will allow your down payment to be a gift from your friends and/or family members. However, the people who give you a monetary gift will have to provide the lender with a written letter confirming that the monetary gift they gave you is, in fact, a gift and not a loan that has to be paid back.
8. Gathering The Required Documentation
Most lenders have a standard set of documents they will request from you when you apply for a mortgage loan. However, each lender will also have their own set of requirements and policies when it comes to approving your application.
It’s a good idea to go ahead and have the following documents pulled and ready to give to your lender along with your mortgage loan application.
- Your most recent paystubs, W-2’s, etc. for each person on the loan. You could be asked for a month or more as proof of income.
- Your two previous year’s income tax returns.
- Three or more months worth of bank statements.
- Proof of investment assets, life insurance, etc.
- Current renters will need proof of positive rental history payments.
- Photo identification.
- Gift letter confirmations for any money you received from friends or family to buy your home. This will serve as proof that the money they gave you is not a loan but is, in fact, a gift that doesn’t have to be paid back.
9. Two Things You Shouldn’t Do Before Applying for a Mortgage Loan
There are two things you shouldn’t do for at least six months prior to applying for a mortgage loan. Try to avoid moving for as many months prior to applying for a mortgage as possible. Lenders like to see stability when considering your application for approval. This goes for changing jobs as well, unless it represents a promotion and a significant increase in income if that income is not considered unpredictable.
10. Four More Things To Do Before Applying for a Mortgage Loan
- Decide on your mortgage terms (15- or 30-year mortgage and whether you want an adjustable or fixed-rate mortgage.
- Try to put enough money down to avoid paying the monthly PMI.
- Ask your lender about any pre-payment penalties.
- Apply to lenders all at once rather than applying for several mortgages over a longer period of time. When applying for a mortgage, applying for several mortgages within say a two week period will only count as one “hard inquiry” on your credit report. However, if you apply now, then apply again in a few months it will show as additional hard inquiries. A hard inquiry will temporarily lower your credit score and you don’t want that when you are trying to buy a house.
You may be asking yourself should I buyer now or wait until next year? Don’t wait until next year! Home prices are at a steady increase. If you would like more information about how to prepare for a mortgage application, or, if you are not sure due to your circumstances if you would qualify, please Contact Us today.
We have a team of experts who can help you assess your situation and possibly help you buy a home, even if you think it might be impossible.
You’ve Got This!
Other Resources Concerning Mortgage
Should I Refinance My Home? – Kevin Vitali
Top 10 Mortgage Mistakes To Avoid – Bill Gassett
Saving For A Down Payment – Luke Skar
Should I Go With A Mortgage Broker Or Bank? – Conor MacEvilly
How Much Do I Need For A Down Payment – Karen Highland
About the author: The above real estate article “13 Fast Track Tips You Can Use to Prepare for a Mortgage Application” was written by Petra Norris of Lakeland Real Estate Group, Inc. With over 20 years of combined experience of selling or buying, we would love to share our knowledge and expertise. Petra can be reached via email at firstname.lastname@example.org or by phone at 863-712-4207