(MP) A common thing first time home buyers often ask me is what should they do first in the home mortgage loan process. My answer is always the same: Start by checking your credit report, after which either improve your credit score or if ready, go out and get pre-approved for a home mortgage.
Obtaining financing is probably one of the most important aspects of the home buying process. Receiving pre-approval gives you the advantage of knowing just how much home you’ll be able to afford. The interest rate will dictate how much a you (the borrower) will be investing in the following fifteen or even thirty years, assuming you keep the property.
Qualifying for a Home Mortgage in the U.S.
Lenders scrutinize the following when assessing your qualifications for a home mortgage:
1. Household income and expenses
Lenders review your income in a lot of varied ways, starting with the total amount. But the way you earn it is also important. For instance, income from bonuses, commissions and overtime may vary greatly from year-to-year. If these sources make up a big percentage of your income, your lender will need to decide how reliable they are.
2. Employment income info
Your employment, salary and bonuses, and any other source of income for the past two years (bring your most recent pay stub, previous year’s W-2 forms and tax returns if possible).
3. Personal assets info
Current balances and up to date statements for any bank accounts, including both checking and savings.
Most current account statement showing today’s market value of any investments you might have such as stocks, bonds or certificates of deposit.
4. Credit and debt info
The balances and account numbers of your current loans and debts, including car loans, credit card balances and any other loans you might have. The purpose is to reach a monthly payment you can afford without creating financial hardships.
5. Down payment
In the past, lenders expected home buyers to make a down payment of up to 20% of the asking price of their home. However, as the average price of homes has gone up, lenders have discovered ways to lower the required down payment so you do have options if you can’t afford such a large down payment.
6. Borrower history
When deciding whether to give you a loan, lenders must determine that you have the ability and willingness to repay the mortgage debt. To make sure that you will be able to pay off the debt, lenders may look at many factors, including:
- Your earnings and outstanding debt
- The kind and amount of loan you are requesting
- Check your credit – Ensuring that you will be willing to pay off the debt, lenders typically look at your credit history and scores. Your credit score predicts how likely you are to repay the debt. What is a credit score? A credit score is a number that indicates statistically how likely a borrower is to repay future debts.Maximize your credit scores by paying down any balances you might have with current creditors such as credit cards, personal loans or loan companies. If any balances you owe on revolving accounts are close to the limit or maxed out it is affecting your score very negatively.
You must always keep revolving accounts under 30% of the spending limit.
Eliminate other debt
Commit to settle or simply pay off any bad debts that are past due. Plan to delete any and all negative items that are affecting your credit score. This includes late payments, charge-offs, repossessions, bankruptcies, judgments, liens, collection items, excessive inquiries, conflicting or inaccurate personal information etc..
Once you start keeping an regular eye on your credit report, you’ll see how you’re doing. Dispute any inaccuracies with the 3 credit bureaus and get everything cleared up. Use our DIY:Credit Repair post! If your debt-to-credit ratio is too high, monitoring your score over time will show you how your score might change.
Decide how to finance
Once you research the types of financing available, decide which is best for your financial situation when buying a home: 15-year mortgage or 30, adjustable or fixed. If you are looking for security and a guarantee that payments won’t increase, a fixed rate mortgage might be the way to go. If you believe mortgage rates could still fluctuate and you want more flexibility, consider an adjustable rate mortgage.
Understand that when you apply for a home loan the “hard inquiry” the lenders make comes on your credit report and temporarily lowers your score. Applying for several mortgages in a two-week period only counts as one inquiry, however if you drag it out and canvas lots of lenders over a longer period, you’ll end up doing damage to your score, that might result in a lower rate than you were hoping for.
Visit a loan office
Things You’re going to need:
- last two years’ tax returns
- last three months’ bank statements
- most current stocks/bonds statements
1) Make an appointment to see a trusted mortgage advisor.
2) Well before your appointment, make copies of the following documents: last two years tax returns most current pay stub; the last three months’ bank statements; most current 401k, stocks, bonds statements; for any debts that you co-signed for, 12 months’ canceled checks proving that someone else is paying the debt.
3) At your preapproval appointment, give these documents to your loan officer and chances are, he or she will be able to run what’s called DU (Desktop Underwriting) and get you preapproved right away.