Once you’ve decided to make the transition to become a homeowner, you’ll need to take out a mortgage. Before you head to the bank, you’ll need to make sure your finances are in order and it’s best to understand how to get pre-approved for a mortgage.
Getting home financing is a process that isn’t as easy as visiting a lender and walking out with a 30-year mortgage. Lenders will pour over every financial detail in your life to ensure you’re a reliable borrower. Following the housing market crash and subsequent recession, regulations became more stringent with regards to financial institutions loaning money for a house.
Knowing what to expect before getting a mortgage will help ensure you can obtain financing without too many complications and improve your chances for finding the perfect home.
Always Check Your Credit
Checking your credit report and score is one of the first moves you’ll want to make once you decide you’re ready to buy (or build) a home.
Your credit score indicates how big of a financial risk you represent. If you have a score in the high range, which FICO considers 740 and above, this indicates you aren’t likely to miss future payments or become delinquent on bills. But anything lower might cause lenders to hesitate.
However, it is not impossible to buy a home if you have a sub-par mortgage score. For example, you can turn to Federal Housing Authority mortgages. Additionally, you’ll also face higher interest and insurance rates, but don’t get discouraged. Work on building up your credit so you have more options available.
Your credit report differs from the score because it is full of information pertaining to your credit history. Common areas on a credit report include:
- Different types of credit you use
- Financial records, such as bankruptcy
- Balances and credit available
- Information about lines of credit recently opened
Checking your credit report is crucial before you obtain a mortgage because while lenders are looking through the report, they may spot a negative point that is actually an error. Even though there are multiple credit reporting agencies, there are instances of errors, such as debt showing up even though you paid it off.
“You want to spot these errors and deal with them before a bank goes through your credit report.”
As such, you want to spot these errors and deal with them before a bank goes through your credit report. Contact the three largest agencies — Experian, TransUnion and Equifax — because you’re entitled to one free credit report from each agency every year.
Know How Much to Save
Twenty percent is the ideal amount you should save for a down payment on a house. But there are other fees you have to keep in mind and set aside money for.
These other costs are known as junk fees and can include expenses relating to:
- Applications
- Brokers
- Sign-ups
- Loan origination
- Underwriting
- Document preparation
Luckily, these fees can be negotiated to something more manageable. Overall, it’s important to know that there are more costs with buying a home than simply the down payment and monthly mortgage payments.
Get Pre-Approved For a Mortgage
Mortgage pre-approval is not necessarily a must, but you’ll benefit immensely from it. To get pre-approval, a lender will comb through your financial history and determine an approved final loan amount.
To do this, the banker will pull your credit history and request additional financing documents including W-2s and bank statements. Once you know what you can afford with an approved loan amount, you can look for houses with a price range in mind and knowing exactly how much you can afford.
The pre-approval process is also a good way to identify possible issues with your credit that may need to be resolved.
Additionally, some sellers and their realtors may prefer to do business with buyers with pre-approval, because it often signals the buyer is serious. So as the real estate market continues to heat up and inventories remain low, your mortgage pre-approval can help you jump to the front of the line.
“Some sellers and their realtors may prefer to do business with buyers who are pre-approved.”
Watch Your Other Finances
With the need for a down payment and other costs, buying a home is expensive. But during the entire process, life goes on and you’ll have to spend money on necessary expenses, and sometimes on costs that are deemed as “wants.”
Keep your other finances in check because it’s even more important that you avoid opening new lines of credit while trying to take out a mortgage. Every time you apply to get a new credit card, a hard check is conducted on your credit history, and this will cause your score to decline. Apply for too many credit cards and lenders will take notice.
Know What You Can Afford
The housing crash in 2006-2007 occurred partly because homeowners took out mortgages with adjustable rates without understanding all of the risks. As rates increased, homeowners were struggling to meet their monthly mortgage payments.
As a result, you have to know what you can afford when taking out a mortgage. Talk with your banker to discuss how big of a mortgage, and whether a fixed or adjustable mortgage would work best. To ensure you account for all expenses, take into account the mortgage payments, property taxes and other associated fees.
Getting a mortgage will take some time. Before you head to your bank, it’s important to understand how to get pre-approved for a mortgage. You can ensure your finances are in order to secure the best possible interest rates and avoid falling behind on future payments.
We can help.
Beginning this process for the very first time can be a bit intimidating. Read this article on how to buy a home in 5 steps. When you’re ready, reach out to a Bank Midwest Mortgage Banker.