Getting Your First Mortgage: Are Your Finances Ready?
Getting a mortgage to buy a home for the first time is often exciting, but it can also be stressful. If finances are not in order, it can become very difficult or even impossible to get a mortgage that allows for the type and size of home you may be considered, as well.
Fortunately, finances can often be worked on before a mortgage application is completed. But in order to do that, it is necessary to know what changes can and should be made to maximize mortgage opportunities and home buying power. Even simple mistakes can be costly when applying for a mortgage.
In most cases, looking into a mortgage and determining borrowing power should be done before beginning to look for a house - as long before as possible. Researching your home buying power long before you begin searching for a home, is usually the best approach for buying your first home.
Nothing is worse than shopping first and falling in love with a home that is out of your price range. Many people are uncertain how much they can actually borrow, and they start looking at houses before they have looked at their budget. That leads to a lot of disappointment when they go to a mortgage lender to apply.
Here are some ways to get finances ready to apply for a mortgage.
Get a Copy of Your Credit Report
Anyone who plans to get a mortgage should be able to get a free copy of their credit report from all three of the bureaus - TransUnion, Equifax, and Experian. Once you receive these reports, carefully go over them to see if there is anything incorrect on them.
Incorrect information on credit reports is a common problem for many people, especially people with similar names or social security numbers, where mistakes can be made by credit bureau workers inputting data to files.
If problems are found on your credit report, disputing the entry with the reporting bureau is the first step. If the debt cannot be proven to be yours, the bureau will remove it and send an updated report.
Have Your Financial Documents in Order
Financial Documents like paycheck stubs, bank statements, W-2s, Form 1099s (for the self-employed), and tax returns may all be requested when applying for a mortgage. Having these documents where they are easily accessible, either electronically or as a paper copy, can make the application process smoother.
Checking to make sure you have these documents before applying for a mortgage can make the mortgage process much easier and faster in the long run. Accurate documentation helps avoid delays that could result in losing that special home due to not being able to close a mortgage loan by the contract date.
Save Money for a Home Down Payment
When you put money back for a down payment, you lower the amount that needs to be borrowed from a bank or other lender. For example, putting a 20% down-payment often means there may be no need for private mortgage insurance (PMI). PMI usually has to be paid when a buyer puts less than 20% down on a mortgage, as added security for the lender against default by the home buyer.
Additionally, as much money should be put aside for your home's closing costs and fees. In addition to a downpayment on a home, buying a home also involves closing costs. Closing costs can include, among other things, appraisal fees, escrow fees, title insurance, loan costs and taxes and insurance for an escrow account.
Depending on the state where you buy your new home, closing costs can average anywhere from 1-3% of the purchase price of the home.
Pay All Bills on Time
Having late payments on a credit report is one of the ways to lower a score very quickly. There may not be anything you can do about late payments in the past, but there is definitely something that can be done about making payments on time in the present and in the future. Set reminders, use a calendar, start auto-pay, or whatever works to ensure that none of your payments are ever late.
Over time, paying on time can noticeably raise a credit score, especially if late payments were what brought that score down in the past. Even one late payment hurts a credit score, so it cannot be said enough to avoid this when possible.
Keep Your Income Stable
People who may want to change jobs may be better off doing so after the mortgage has been obtained and the home has been purchased and closed. There are some exceptions for people changing companies and staying in the same field. Speak to a mortgage lender before making the decision to change jobs or careers.
Often it may be necessary to delay a job change or the home buying process if doing both at once would interfere with the mortgage process. And for self-employed borrowers, usually at least two years of stable self-employment income is necessary, as well.
Limit New Purchases and the Use of Credit Cards
Once you begin the process of obtaining a mortgage, certain financial ratios are used to figure out how much you can afford for a home.
Using your credit cards as you normally would (for small amounts that are paid off quickly) generally is not a problem. However, applying for and getting (and using) a new credit card might change the financial ratio and the amount you can spend for a home. This is often the case for borrowers who are already close on ratios of income and credit. Adding new debt through the use of credit cards or even buying a new car, could mean a debt-to-income ratio that is too high to qualify for a home mortgage.
In most cases, until the loan has closed and the deed has been recorded, it is best not to purchase new cars, finance new furniture or appliances, or apply for new credit cards. Those things can be done once ownership of the house has actually transferred and the mortgage has been recorded.
Shop Around for Rates and Terms
Once you begin the mortgage process and are approved for a mortgage, make sure you are getting the best interest rate and terms. Home buyers, even first-time home buyers, do not have to take the first loan that is offered. There are often many sources, including banks, credit unions and mortgage brokers where a mortgage can be obtained.
Remember that a lower interest rate can often mean a lower house payment and less money paid toward the mortgage over time. There may also be a difference in closing costs between lenders that can mean significant savings at the closing table and over the entire life of the mortgage loan.
The process of obtaining a loan for your new home can seem quite confusing, but with some preparation and knowledge, you may just be able to move forward with your home search with the confidence of knowing what you can afford.