6 things to do before you apply for a home loan advice, Property fund guide, Mortgage tips
6 Things to Do Before You Apply for a Home Loan
8 July 2021
Applying for a mortgage for the first time can be intimidating. The process can be complex, and the criteria confusing. But, if you take time to learn what lenders are looking for, you can up your chances of getting favorable terms on your loan. Before you even begin looking for a loan, get the following in order:
1. Get copies of your credit reports.
Under federal law, you are entitled to free copies of your credit reports from the three national credit bureaus once a year. If you are getting ready to apply for a loan, it’s imperative to see what your reports look like now.
Carefully go over your report to ensure that there are no errors that can reduce your credit score. One in three reports has at least one error. Duplicate records, accounts that should be shown as paid in full, and other issues could cost you points on your score.
2. Improve your debt-to-income ratio.
Your debt-to-income ratio is the percentage of your income that goes toward debts each month. Lenders want to ensure that you can afford mortgage payments. The lower the portion of your income that goes to debt, the better your chances of getting approved.
If you are applying for a Washington DC mortgage, or for one in another competitive market, your income will need to be high enough to cover your mortgage along with other debts and your monthly living costs. Increasing your income by taking a higher-paying job or adding a second job can help you qualify for a higher loan.
You can also cut your ratio by paying down existing debts. This reduces what you owe, meaning that less of your income goes to those debts in the future.
3. Put money away for a down payment.
The larger your down payment, the better the terms of your loan. Some loans are available to first-time borrowers with as little as 3.5% down. However, the more you can afford, the better.
If you can get together 20% of the value of a home, you can avoid private mortgage insurance (PMI). PMI insures the lender but is not needed when the borrower has enough equity. Foregoing it can save you a significant amount on your mortgage payments each month.
4. Pay all your bills on time.
On-time payment is one of the factors that impact your credit score. This figure alone makes up 35% of your FICO score. A few late payments will not completely tank your score. However, the closer you are to a perfect payment history, the better your score will be.
Many people find that automating their payments is a good way to ensure that everything gets paid on time every month. Taking some time to set up automatic billing can save you time every month and protect you from forgotten payments on your credit cards, car loan, or any other debt.
5. Determine your housing budget.
Lenders typically want to see a maximum of 36% of your income going toward your mortgage and all other debt. You can figure out how large a loan you can afford by going through a pre-qualification. Typically, these do not involve a hard pull on your credit, so they will not affect your score.
6. Research loan options.
When you are ready to talk to lenders, it’s important to understand the different types of loans available. This can help you understand the pros and cons of different terms to choose the right one for you.
A fixed-rate loan, for instance, is one that keeps the same interest rate through the life of the loan. These can be a good choice if interest rates are low and you plan to stay in the house for some time. Adjustable-rate loans, on the other hand, have interest rates that change periodically. Often, these have lower interest rates early in the loan but are increased later. If you anticipate moving again within a few years or refinancing the loan, these could be a choice that will save you the most money.
It’s also important to learn about factors like loan terms, points, and what sorts of fees you might be subject to.
Buying your first house is a huge step. When you do what you can to prepare, you can ensure that you get the best terms possible and build the sort of financial future that you want.
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