Mortgage rates have been rising as the US economy is gathering strength. Some renters who have been on the fence about buying a home have been starting to think about getting into the market before rates nudge above 5% in the next year or so. But buying your dream home is not as easy as finding the house you want and make a deal with the home owner.
Most of us need to get a mortgage and while it is still not difficult for many of us, there are some things you should be aware of before you call or email the loan originator.
If you want to enhance your chances of getting a loan with good terms, there are some steps you should take.
Here are the top things you need to know about the mortgage process:
#1 What Do You Need?
When you apply for the loan, most home lenders will want a standard amount and type of information. They want your pay stubs, two years of tax returns, three months of bank statements and documentation about investment accounts. If you are seeking a first-time mortgage loan, we can’t underscore the importance of getting organized before you start shopping lenders.
It is wise to have these materials already in hand before you contact any lenders. All of them will ask for the same documents to get you pre-approved for a mortgage.
#2 Know What You Can Spend
Most home lenders use the 28/36 rule. This means your monthly payment on your home cannot be more than 28% of your gross income, and all of your total revolving debt payments cannot be more than 36% of your gross income. This is not an absolute rule; some loan programs backed by FHA may allow you to have a higher debt to income ratio. But the 28/36 standard is a good rule of thumb to keep in mind about the type of payment you may get approved for.
#3 Understand the Market
The type of loan you can get may depend upon the market and the sort of home you buy. For instance, in Florida, lenders often have stricter standards to buy condominiums. They may look not just at your finances but at the building’s finances. They could require a 25% down payment.
#4 Increase Your Credit Score
A major factor in getting approved for a home loan with a good rate is having a solid credit score. You should know what your credit score is from the three major bureaus. Once you know what the number is, there are several things you can do to increase it. First, make sure there are no mistakes on the report that is dragging down your score. Also, if you have a balance on there that you can pay off, this will increase your score quickly. Avoid taking out new loans or having further inquiries on your credit as these things can damage your score.
#5 Pay Down Debt
Lenders want to see that you are not overextended when getting a loan. So, pay down credit cards, student loans and auto loans if possible. Ideally, you should be using 10% or less of your available credit lines with no late payments in the past 24 months.
#6 Have Taxes in Order
All lenders want to see two years of tax returns. They also want you to sign a release form, so they can verify the information with the IRS. What you sent the mortgage company must match what you sent the IRS.
#7 No Big Purchases
Even after you get a pre-approval for your mortgage loan, do not go out to celebrate with a new Lexus and car loan. Your finances will be checked until the day of closing. The lender will always rerun your credit before closing to ensure your finances are the same. If you want to buy something big on credit, wait until the loan is closed and funded. At that point, you can buy whatever you like.
#8 Check Employment History
One of the things that trip up some home buyers is a recent job change or job interruption. Ideally, the lender wants two years of full-time work in the same job or at least the same industry. A common mistake is to quit a job in the middle of the mortgage approval process. Even if you will begin another job next month, the loss of income could torpedo your mortgage application.