6 Things to Do Before Applying for a Mortgage
Applying for a mortgage is never simple, but it’s even trickier when you don’t know what to expect. If you’re preparing to buy a house for the first time, you can make the process easier on yourself by learning as much as you can ahead of time, before you’ve found your dream house. Knowing what to expect allows you to plan ahead and improve your chances of getting a mortgage with favorable terms.
Here are six steps experts say you should take now to ensure that when the time comes, your mortgage application will go as smoothly as possible.
1. Know Your Budget
If you want to qualify for a mortgage on your first try, it’s important to know how big of a loan you can reasonably afford. Lenders figure this out by looking at your debt-to-income ratio (DTI): the percentage of your income that you’re spending each month to pay your debts, among other things.
Most lenders have two separate rules about your DTI. First, it’s favorable if you don’t spend more than 28% of your income on your mortgage payment. Second, your mortgage plus all your other debts shouldn’t eat up more than 36% of your income. You can speak to a lender and go through a quick pre-qualification process to find out how much you can qualify to borrow and determine your budget for a home.
2. Improve Your Debt-to-Income Ratio
When applying for a pre-qualification, if you are told that you won’t qualify for a big enough loan to afford a house in your area, you can take steps to improve your DTI before you start house shopping. There are two ways to do this:
- Increase Your Income. You’ll qualify for a bigger home loan if you make more money. Start thinking about how you can get a promotion, move to a higher-paying job, work more hours at your current job, or start an income-generating side business.
- Reduce Your Debt. Making more money isn’t always an option. For most people, it’s easier to improve their DTI by paying down other debts, such as credit cards, student loans, or auto loans.
3. Save Up for a Down Payment
If you have no other debts to pay off and you can’t increase your income, your best option is to shrink the size of the home loan you need. The easiest way to do this is to save up a bigger down payment. As a bonus, if you can manage a down payment of at least 20 percent, you won’t need private mortgage insurance, which will lower your monthly payment.
4. Boost Your Credit Score
When you apply for a mortgage, having a good credit score is a huge advantage. It will allow you to qualify for a better interest rate, saving you thousands of dollars over the life of your loan.
If your score isn’t that high, there are a few ways to improve it. Paying off debt and paying all your bills on time will help the most. It’s also useful to avoid opening new accounts while keeping all your old ones active.
6. Know Your Loan Options
Before you start shopping for a mortgage, learn about the different loan options available to you and what they have to offer. Here are a few things to look into:
- The difference between fixed-rate and adjustable-rate
- FHA and VA home loans
- Special programs for first-time homebuyers in your state
- Factors that affect your interest rate, like loan term and points
- Types of fees you may need to pay on a home loan
6. Find the Right Lender
Once you know what you want in a home loan, it’s time to start looking for a lender. There are three important things to look for in a mortgage lender:
- A good understanding of the mortgage business. The lender should know all about the different loan options you researched above, as well as any special rules that apply in your local area.
- A good overall reputation.
- A good deal. This means more than just the interest rate – look at the combination of interest rate, points, and other fees to see which lender can give you the most bang for your buck.
7. Get Your Paperwork in Order
Once you’ve found the right loan and the right lender, the last thing to do is gather together the documents you’ll need to apply for a mortgage. For starters, most lenders will expect to see your pay stubs from the past month, your tax returns from the past year, and a few months’ worth of bank statements. Other important documents include credit card and loan statements and proof of your assets, such as retirement funds and other investments.
Nothing can completely guarantee that your loan application process will go smoothly. However, the more you prepare ahead of time, the easier it should be to get the loan you need on the home you want.
Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we have made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.