What To Know Before Applying For A Mortgage
The process for applying for a mortgage can be time consuming, complicated and frustrating. It’s not designed to be a breeze, for a number of reasons. Quite often the reason people do get frustrated during the process though, stems from their own lack of preparation before entering the mortgage market. Lenders have their own checklists and measures that they go through before giving out mortgages to people. And prospective homeowners should do the same thing; they should have their own set of plans in place before applying for a mortgage.
A mortgage is a huge, multi-year financial commitment and quite often the biggest financial decision someone will make in their life. If you are about to enter this crucial phase of life sometime soon, then let’s go over what you need to know before applying for a mortgage.
START PREPARATIONS EARLY!
Preparing for a mortgage application should not start once you’ve already picked your dream home and the seller has accepted a bid. Your mortgage application should have started much earlier than that!
Start scouting for lenders and having all your documents prepared at least a year before you start looking for homes. It’s important to enter this period of your life with a mindset that is patient, prepared and knowledgeable about what will happen. This will make things run much smoother later on and up until moving day.
For buyers, mortgage pre-approvals are among the most under appreciated tools they can have to speed up the mortgage approval process. A buyer with a pre–approval in their possession as of the date of offer will typically see far quicker closing times by up to a week or more.
Mortgage pre–approval letters are like a test run. They are approvals based on a set of loan criteria that will eventually lead to a closing sale. During a pre–approval process, a lender will examine a loan application that will include performing income and asset verifications. They will also look for specific loan traits which may affect a buyer’s final approval such as their credit scores, any required child support payments, and the availability of a co–signer, among others.
When a pre–approval letter is sent to a buyer, the only missing detail is the physical address of the home being purchased, according to many loan industry experts.
With a pre–approval letter in hand, a buyer can move immediately from the “Writing The Contract” phase to the “Underwriting The Loan” phase, which can save 7 or more days during the approval process.
PROTECT THAT CREDIT (SCORE)!
Know your credit score like the back of your hand is the advice lenders will tell home buyers, especially first time buyers. If you have any disputes about your score, contact the agency or bank concerned immediately. Ensure you have paid down your credit card balances as the less you owe in comparison to your available credit, the better off you’ll be.
And timing is everything, including paying your bills on time.
It’s important to not get too downhearted if your credit score is less than perfect. There are literally hundreds of programs available for you to fast track an improvement in the score. Lenders and banks want to ultimately know that you’re responsible with your finances. They must see that you’ve been making payments on time on all of your bills before they feel comfortable enough to give you a mortgage loan.
BE OPEN AND HONEST WITH LENDERS
Be open and honest with your lender, even if you think it may harm your chances for a mortgage approval. A chief reason for being open and honest is that withholding any information (or worse, lying) from your mortgage application can constitute fraud. This is far worse of an outcome than not getting a mortgage!
Secondly, your mortgage lender will likely be able to uncover what you’re hiding or lying about anyway.
As part of the mortgage approval process:
- An extensive credit check is performed which lists your creditors, debts, and judgments.
- An occupancy test is conducted by an underwriter to determine whether you really live where you say you do.
- An employment check is completed to verify your employment status and income.
- Public records are thoroughly examined, just in case the above checks fail to include information the lender would need as part of your mortgage approval.
Armed with all of this information, if a mortgage underwriter were to uncover any major discrepancies between your mortgage application and the information gathered, they will ask you to explain why in detail and your loan will likely be denied as a result.
KNOW YOUR DEBT: INCOME RATIO
Another important factor in getting a mortgage is having a low debt to income ratio. How much you are going to owe when compared to how much money is coming in each month is a huge deciding factor for a lender approving your mortgage application.
The general rule of thumb is that your debt to income ratio should be 36%. So each month your total debt, that’s mortgage repayment and all your other bills combined, should not exceed around 36% of your total income.
36% is often considered the most conservative of figures and many financial institutions will be comfortable going as high as 43%. However, the higher the debt to income ratio you require, the more additional positive factors will a lender seek (like other property and investments). These ‘sweeteners’ may be enough for you to seek a loan with higher debt to income ratio.
AND FINALLY… SAVE!
This probably isn’t earth-shattering advice and in all likelihood you have been saving money already. But a mortgage doesn’t cover the whole price of the home, you will have to make a down payment.
Know how much you’re looking to spend on a house, and assume that you’ll put down anywhere between 5% and 20% of the purchase price, likely closer to 20%. The more you can afford for a down payment, the better off you’ll be. So start saving!