Getting a home loan can be a complicated process, but you can make your journey to homeownership a lot easier and smoother by carrying out a few important steps before you formally meet with a lender for applying for a home loan.
What To Do Before Applying For A Home Loan
Outlined below are some of the steps you should take before you officially apply for a home loan.
Research What Kind Of Loan You Might Want
Do some research about the different types of loans that are available so you will have an idea of which one will work best for you. With a fixed-rate mortgage, the amount of money you will pay in total for the principal and interest will remain the same throughout the entire term of the mortgage because the interest rate will never change.
In contrast, an adjustable-rate mortgage carries a rate that will change from time to time according to the economy’s interest rates. This means that your monthly payment may decrease when rates fall and rise when rates go up.
A hybrid adjustable-rate mortgage, meanwhile, sees borrowers paying a fixed rate for a certain period of time, after which the interest rate switches to an adjustable one and is variable for the remainder of the term of the loan.
Some borrowers may also be eligible for special types of loans such as loans insured by the Federal Housing Administration (FHA), Veterans Affairs (VA), or the U.S. Department of Agriculture.
Know How Much You Can Spend
You need to know how much money you can afford to spend on your new home before you apply for a home loan. Getting prequalification or preapproval from a lending institution can provide important guidance in this regard.
As a general rule, a person who is making a down payment of 20% and does not have a lot of other debt should seek a monthly mortgage payment that is not more than 28% of their pretax monthly income. Another good rule of thumb is to look for homes that do not cost more than approximately three times your yearly household income.
Know The Market You Are Buying In
Do some research on the market in which you plan to buy a home to ensure the timing is right and the prices are reasonable. If you look at listings in the area you are considering, you can find typical price ranges as well as price trends. Although less desirable neighborhoods may have lower home prices, it is important to weigh that against the potential resale value of the home if you do not plan to stay there long term.
Raise Your Credit Score
Your credit score plays a big role in determining your mortgage interest rate as well as your possibility of being approved in the first place. Because you will be borrowing a significant amount of money, even minor differences in the rate of the loan you are offered can have a big impact on the total cost you will pay for your mortgage over time.
Having a poor credit score can cost you a significant amount of money and interest over the lifetime of the loan and can raise your monthly payment by several hundred dollars. This is why it is essential that you work on improving your credit score by paying off any debt you owe and making payments on time.
You should also avoid opening any new accounts or closing old ones as this can also impact your credit score. If you do have a late payment in the past, you may be able to have your card issuer remove it from your record by writing a goodwill letter.
It is also important to check your credit report for any mistakes that could be negatively impacting your score. This should be done as early in the process as possible because it may take time for errors to be fixed.
Pay Off Your Debt
If possible, you should also pay down any debt that you owe before applying for a loan. Although your credit score carries a lot of weight with mortgage lenders, they also consider your debt-to-income ratio, which compares your total debt payments to your gross monthly income.
Generally speaking, your debt to income ratio should not exceed 43% if you want to qualify for a mortgage. In practice, however, most lenders prefer to see a lower ratio. Therefore, if you do owe a lot of money, it is important to pay some of it down in order to get approved. Paying down debt can also improve your credit, which can influence your mortgage rate and monthly repayments.
Have Your Taxes In Order
The mortgage application process requires a significant amount of paperwork, so it is a good idea to start getting your financial documents in order as early in the process as possible. You will need to provide several tax documents, including tax returns, W9s from employers or 1099s if you are an independent contractor, your pay stubs and other documentation proving you have had a steady income for at least two years. You will also need proof of assets to demonstrate that you are capable of paying the down payment as well as the closing costs. This proof may come in the form of bank or brokerage statements.
Hold Off On Big Purchases
You need to keep your finances and credit stable until you close on your home, so do not make any big purchases, particularly on credit.
Work With A Mortgage Broker From MyLendingPal For Applying For A Home Loan
For expert guidance throughout the home loan process, work with an experienced mortgage broker from MyLendingPal to ensure you are getting the best deal possible. Feel free to reach out to them by phone or requesting a online consultation today!