What to Do Before You Apply for a Home Mortgage
By Tracy Scott
Homebuying season is fast approaching, and the idea of visiting model homes and open houses fills you with anticipation. But, before you step into your first design center or purchase your tour of homes ticket, learn how to shop smart for a new home.
For some, saying goodbye to renting often begins with applying for a home mortgage – but should it? Despite its updated housing forecast, Fannie Mae still expects homebuying to increase in affordability this spring. Knowing what that means for you and your family can save time when shopping for your first home.
Here’s what you should do before you apply for a home mortgage to increase your chances for loan approval and to stand out in the competitive home buying market.
Improve Your Credit Score
Review your credit history report to know where you stand and what you need to do to improve your score. A proprietary algorithmic formula is used to translate aspects of your credit history report into a credit score. High credit scores often translate to the best interest rates and terms on home mortgages. This can mean $1000’s in savings over the life of the loan.
Most home loans require a minimum credit score of 620. However, lower scores can still garner approval depending on how much money you put down and the details of the loan program.
You can improve your credit score by removing inaccurate information, paying your bills on time and reducing or eliminating your debt obligations. Review your credit history report from each of the major credit bureaus (Equifax, Experian, and TransUnion) since the content of each report can vary. Creditors may report your credit activity to one, none, or all three of the bureaus. Potential loan lenders do not all use the same credit bureau to review your credit.
A free copy of each credit history report is available once every 12 months from AnnualCreditReport.com.
Eliminating debt not only improves your credit score, but it also improves your debt-to-income ratio (DTI). Generally, the lower your DTI, the higher your loan approval amount. The DTI is figured by dividing your monthly debt payments by your gross monthly income.
For example, if you have debt totaling $4,000, with a gross monthly income of $8,000, then your DTI is 50%. Depending on the loan program, you can be approved for a mortgage if your DTI is at 50%. More favorable interest rates and terms are available for DTI’s that fall in the 36% to 43% range (or less).
Reduce or eliminate debt by working extra hours, taking a second job, or starting a side hustle to pay off debt quickly. It can have a positive impact on your mortgage approval.
Know Your Budget
Your DTI ratio only tells part of your financial story. The standard recommendation is to keep your mortgage payment to no more than 35% of your monthly income. While it’s tempting to use that recommendation to determine your mortgage budget, you’ll want to consider your overall financial goals.
A new home adds more than an additional mortgage payment to your budget. Include the added costs of insurance, maintenance and repair expenses, and possible homeowner association fees. Be realistic about these anticipated expenses and your hopes to start or continue a college savings plan, individual retirement account, vacations, and other lifestyle goals. If most of your money is tied up in a mortgage payment, you may not have the extra money to achieve your other financial objectives.
Review your monthly budget and ensure it accounts for financial goals beyond homeownership.
Get Pre-qualified for a Home Mortgage Loan
Mortgage pre-qualification helps assess whether you’re in a financial position to take on a mortgage. It can also provide an estimate of how much home you can afford. By answering basic questions about your debts, income, and employment, a lender can determine if you would qualify for a home loan. Mortgage pre-qualification differs from a mortgage pre-approval in that it’s based mainly on the information you provide to the lender.
Obtain a prequalification before you start your home search. Contact an Atlantic Financial representative to obtain a free pre-qualification.
Get a Pre-approval for a Home Mortgage Loan
A mortgage loan pre-approval provides you with a maximum loan amount eligibility by taking an in-depth look at your credit score, debt to income ratio, and employment history. Potential buyers with a mortgage pre-approval are taken seriously by sellers because they appear to be ready to buy. You’ll likely need a pre-approval letter before placing an offer on a home. However, a pre-approval does not mean you have secured a particular mortgage.
Once you receive your pre-approval, avoid adding new debt or making other financial changes other than reducing your debt load.
Shopping for a home can simultaneously be exhilarating and overwhelming for you and your family. Knowing the steps to take before applying for a home mortgage will allow you to make decisions from a strong financial position and potentially save time and money. Contact an Atlantic Financial FCU representative today for assistance navigating the home mortgage loan process.