6 Critical Steps to Take Before Searching for a Mortgage
The real estate market is up in many areas, while interest rates remain low.
For many people, renewed optimism about their lifestyle is leading them to get serious about buying a home.
If we learned anything from the collapse of the housing bubble, then we should know that going into a mortgage shouldn't be done lightly.
There are many important aspects to consider and research before the process of selecting a home even begins:
1. Check Your Credit Report
Here at MyBankTracker, we are always reminding our readers about the importance of knowing your credit score.
Whether you are considering buying a home now or in the future, you need to know your score through all three major credit reporting agencies, Equifax, Experian, and TransUnion.
Your credit score is the key to getting the best interest rate on a mortgage.
When Your Credit Score Is Too Low for a Mortgage
Mortgage lenders have tightened their credit requirements since the freewheeling lending days that led to the financial crash.
Borrowers need, in general for a conventional mortgage, a minimum FICO score of about 650.
Remember, the higher your credit score, the lower you mortgage interest rate will be.
With a lower credit score, expect to put more down
With a lower score, the best thing that you can do to increase your chances of getting a mortgage is to increase your down payment.
The more equity you have in the property, the less the risk is to your lender.
Consider mortgage alternatives
The U.S. Department of Veteran Affairs has a program that helps service men and women, veterans, and qualified surviving spouses become homeowners.
The VA does not loan money but offers lenders a guarantee on your home loan equal to 25 percent of the approved loan up to the maximum allowed for the year.
Although the VA does not set minimum FICO scores for mortgages, its partners have set a minimum of 620 as a credit score for a VA mortgage.
Another option is see if you can get a Federal Housing Authority (FHA) mortgage.
Because these loans are backed by the government, lenders are more forthcoming to borrowers with less than stellar credit.
Although higher scores are always preferable, FHA policy requires a minimum FICO score of 580 for a 3.5 percent down payment.
With a credit score between 500 and 580 the down payment must be 10 percent.
The US Department of Agriculture has a home loan program for which you may qualify as well.
The program is designed to assist rural residents with moderate incomes.
Raise your FICO score
If your credit score is too low for a convention mortgage, the best solution is to raise it.
Step one is to get your credit reports from all three credit reporting agencies.
A credit report is not the same as a score but the reports will tell you how you are handling your debts.
You can get your FICO score directly from myfico.com while you’re entitled to get a free annual credit report from Experian, TransUnion and Equifax through AnnualCreditReport.com.
Be sure to scrutinize the reports for inaccuracies.
It doesn’t cost anything to dispute inaccurate information.
Identity theft is becoming more common.
If you see any accounts that you did not authorize, you’ll probably have to file a police report as the first step for having them removed.
Beyond that, you can improve your score, by paying your bills on time and getting the percent of credit utilized lower.
Both the Federal Trade Commission (FTC) and the Consumer Finance Protection Bureau (CFPB) warn consumers to be very leery of companies that claim they can raise your credit scores by removing accurate records of delinquencies.
This behavior of these companies is governed by the Credit Repair Organizations Act (CROA) which made it illegal for credit repair companies to mislead you about what they can do and to charge you in advance for their services.
Everything a credit clinic does for your has to be spelled out in advance with a time frame for results and the total cost you pay, while you're given a three day right to rescind the contract without a charge.
A better path is to turn to respected nonprofit organizations like HomeFree-USA and HOPE NOW for help in getting your credit score to the point where you’ll qualify for a mortgage on the home of your dreams.
2. Pamper Your Credit Score
If you find any errors on it, now is the time to get to work on fixing it by contacting the agency and providing the information they request.
Whether your score is low or high, take all of the steps that you can to build it up: don't apply for additional lines of credit, don't close any accounts, and don't make any big financial moves that could negatively affect your credit score.
3. Meet With Lenders
Don't wait until you have a house lined up to meet with lending banks, or be lulled into using the first one that comes along, or the one in cahoots with your real estate agency.
A lender affiliated with an agency isn't necessarily a bad choice, but like any great deal, it's a very good idea to shop the market and see what is out there.
Come armed with your credit reports printed out, and hold off on authorizing them to run a credit report as too much activity can negatively affect your rating.
A lender can pre-qualify you for a loan without checking your credit.
Find a lender who is willing to explain the details of all the mortgage products they offer to you in clear, concise terms, and don't be afraid to ask questions.
Once you find the right lender, you can work with them to get pre-approved for a loan, which will involve running a credit check, verifying your employment, and other details.
At that point, you'll know what kind of house you can comfortably afford and what your payments will be, as well as how much you'll need to have as a cash down payment.
4. Start Saving for the Biggest Down Payment You Can Afford
The higher your down payment, the better off you will be.
A lower interest rate, a higher loan amount, better offers on other closing fees will all be yours if you go into the housing market with a beefy down payment.
Funnel as much as possible into a strictly guarded savings account designed solely to house your down payment money. Make the goal a must, not a maybe.
5. Improve Your Debt-to-Income Ratio
You debt to income ratio is another important factor banks will consider before offering a mortgage.
It's the amount you make in contrast to how much you owe.
If you can increase your income or reduce your debt, you are more likely to get a favorable deal.
Try making bigger payments on any credit card or other loan debt to boost your debt-to-income ratio.
You will not only be a better mortgage candidate, but you may also save some money on interest along the way.
6. Don't Make any Major Purchases
It might be tempting to start buying new furniture, upgrade the appliances, or make other purchases for your new home, but it is best to wait until after you've closed on your loan.
Big purchases can affect your credit score and debt-to-income ratio if made on a credit card, and if they are purchased with cash, that money is best spent on a down payment.
Wait until after you close the deal on the mortgage and you are in the house to start making big purchases.