When preparing for a mortgage, there’s a lot to think about. Every lender will have their own unique requirements and even if you have experience applying for a mortgage, there may be new things that arise or questions that you have.
Even before you apply for a mortgage, you should already be preparing for it. There will be a lot of documents that you’re expected to provide and some things that you’ll need to prepare in advance. If you want to increase your chances of being approved for a mortgage, then you’ll want to act as soon as possible.
To help the process of preparing and applying for a mortgage go smoothly, here are some tips to get you started.
Keep an eye on your credit report
If you’ve never applied for a mortgage before, then you may not realize that your credit report plays a huge role in whether your application is accepted by a lender. Unfortunately, many people are denied because of this or they experience difficulties during the process.
With a poor credit report, a lender may choose to reject your application entirely or choose to accept it so long as you agree to make monthly MIP payments. For applicants who had no idea their credit score affected their mortgage, this can be both surprising and distressing.
Before you even begin an application, be sure to get a copy of your credit report. Look through it carefully for any inaccuracies and if you find some, dispute them right away. It may take several weeks for a dispute to settle, but it’s worth the time and effort as it will remove negative marks from your report.
Know what you can afford
A lot of people have an image in mind of their dream house long before they start to look at prices. Unfortunately, depending on where you live, you may not be qualified to take out a loan for your dream house. The price may be too high, the lender may not think you can afford the loan, or the costs and fees may add up to be too much.
To avoid defaulting on your mortgage, it’s important that you know what you can afford. With the help of a mortgage calculator, you can do this from your own couch rather than in a lender’s office.
By taking the time to calculate what you can afford and to set a budget, you’ll save time and energy when it comes time to search for both a home and a lender. Rather than waste your time looking at places you won’t be able to afford or applying for loans that you won’t be approved for, you can spend time looking for affordable houses and applying for mortgages that you can afford.
Take care of existing debt
As much as 80% of Americans have some form of debt, whether it’s due to student loans, medical procedures, consumer purchases, or some other transaction. While it’s a common occurrence, you’ll want to take care of whatever debt you might have before applying for a mortgage.
You don’t need to get rid of all your debt for a mortgage, but you should try and reduce it.
During your application, lenders will look into your debt-to-income ratio to determine whether you can afford another loan or if you are too risky of a borrower. This can be both a blessing and a curse as you don’t have to pay off all existing debt, but if you don’t pay off enough, then your mortgage application may be denied or come with additional, costly requirements.
Rethink major job changes
Another thing that lenders don’t like to see, along with debt, is major life changes. If you’ve recently quit your job or you haven’t been with your current employer for very long, they’ll be warier of you as a borrower.
Lenders want to see that you have a steady source of income, so if you know that you want to quit your job, you should wait until after you’re fully approved for a mortgage. Additionally, if you changed jobs only a few months ago, you may want to wait until you have a longer work history with your current employer before showing up at a lender’s office.
In general, you’ll want to have worked at the same place for at least six months before submitting a mortgage application. If you’re self-employed, prepare to face a few additional challenges.
Research additional fees and penalties
What many new borrowers don’t realize is that mortgages often come with additional fees and may even have penalties for some situations.
Some lenders will roll closing costs into your monthly mortgage payments, but others will expect you to pay them separately at the end of your loan term. If you end up paying your mortgage off before the end of the term, you may also be faced with a penalty.
The most common mortgage fees can cost anywhere from $1,900 to well over $3,000. When fees are calculated based on a percentage of the loan amount (and they often are), these costs can quickly skyrocket. And this only includes fees that you’re most likely going to pay; it doesn’t include fees that may or may not be required such as homeowner’s title insurance, the application fee, the underwriting fee, or the processing fee.
Be prepared for the challenge
Being approved for a mortgage is no easy feat and in some cases, you may have to try several times before your application is accepted. While there are ways to prepare for a mortgage and make the process move quicker and smoother, there is no way to guarantee that a lender will view you as a trustworthy borrower.
The mortgage process is full of challenges, but it isn’t impossible. For future homeowners who are determined and willing to put in the extra time and work, the end reward is worth it.