I recently wrote that you should look for a mortgage before searching for a property to buy because unless you have lots of cash, you’re going to need a loan.
Now let’s talk about what you should do before you apply for a mortgage to avoid common setbacks that could, well, set you back.
Preparation is paramount when it comes to getting a home loan. And you don’t get a second chance to make a first impression.
Get these details right the first time around and your mortgage experience should be a lot smoother.
1. Rent a Place First
While it might sound like a no-brainer, renting before you buy a home or condo is a smart move for several different reasons.
For one, it’ll show you firsthand what goes into homeownership. If things break or go wrong while renting, you can typically call the property management company or landlord for help.
Once it’s your own place, you’ll be fixing it yourself or paying out of your own pocket for a professional to assist you.
Additionally, if you rent first you’ll have a lower chance of payment shock, which is when monthly housing payments jump exponentially.
Mortgage lenders like applicants who have shown in the past that they can handle large housing payments to ensure they don’t default for that very reason.
So renting will make you both a more knowledgeable homeowner and a better candidate for a mortgage.
That being said, it’s perfectly acceptable to live at your parents’ house before you apply for a mortgage too, at least in terms of qualifying.
2. Check Your Credit Scores and Reports
Most cliché advice ever. Yes, but there’s a reason. It’s very, very important, if not the most important aspect of home loan approval.
It also happens to take a lot of time to fix credit-related issues, so it’s not a last-minute activity if you want to be successful.
These days it’s also super easy to check your credit scores and reports for free, thanks to services like Credit Karma or Credit Sesame. Many banks and credit card issuers offer free credit scores as well.
Simply taking the time to sign up and monitor your credit could make or break you when it comes time to apply for a mortgage.
It may also save you a ton of money as higher credit scores are typically rewarded with lower mortgage rates, which equates to lower monthly payments and lots of interest saved.
If your scores aren’t all good, tackle the issue(s) immediately so you’re in excellent standing (780+ FICO) when it comes time to apply.
3. Pay Down Your Debts
Similarly, knowing much how outstanding debt you’ve got, along with the associated minimum payments, can play a huge role in a mortgage approval.
Simply put, the less debt you’ve got, the more you’ll be able to afford on your given salary, all else being equal.
It can actually be a win-win to pay down debt prior to a mortgage application because it’ll boost your purchasing power and probably increase your credit scores at the same time.
The result may be even more purchasing power thanks to a lower mortgage rate, which drives payments down and increases affordability.
To determine how much debt you’ve got, grab a copy of your credit report and add up all the minimum monthly payments.
These all eat into your affordability, so eliminating them or reducing the balances can help allocate more money toward a prospective mortgage.
4. Put the Spending on Hold
Staying in the credit realm, avoiding unnecessary swiping (or now dipping/tapping) weeks and months before applying for a home loan can have a big impact.
First off, your credit scores may drop as a result of more outstanding credit card debt. It’d be silly to make a small or medium-sized purchase that jeopardized your very large home purchase.
Secondly, the new debt may eat into your DTI ratio, thereby limiting what you can afford, even if you pay off your credit cards in full each month.
In other words, it may be best to just wait and make your purchases a month later, once your mortgage funds.
This is also true during the home loan process – don’t go buying the furniture until the mortgage crosses the finish line. Make sure the ink is dry!
5. Organize Your Assets
Now let’s address assets, which are a close second to credit in terms of importance.
After all, you’ll need them for your down payment, closing costs, and for reserves, the latter of which shows the lender you’ve got money to spare, or a cushion if circumstances change.
But it’s one thing to have these funds, and another to document them.
You’re typically asked to provide your last two months of bank statements to show the lender a pattern of saving money.
To make life easier, it could be prudent to deposit all the necessary funds in one specific account more than two months before application.
That way the money will be seasoned and there won’t be the need for explanation letters if money is constantly going in and out of the account.
The ideal scenario might be a saving account with all the necessary funds to close and little or no activity on said account for the past 90 days.
6. Think of Any Red Flags
Asset issues are often red flags for loan underwriters. They hate to see money that was just deposited into your account, as they’ll need to source it and then determine if it’s seasoned.
Same goes for recent large deposits. They need to know that it’s your money and not a gift or a loan from someone else since it wouldn’t technically be your money.
Try to think like an underwriter here. Make sure assets are in your own account (not your spouse’s or parents) well in advance and that it makes sense based on what you do for a living/earn.
Also take a hard look at your employment history. Have you been in the same job or line of work for at least two years, is it stable, any recent changes?
Any weird stuff happening with any of your financials? If so, address it personally before the lender does. Work out all the kinks prior to giving the underwriter the keys to your file.
And don’t be afraid to get a pre-qual or pre-approval just to see where you stand. You can have a professional take a look for free with no obligation to use them when you really apply.
7. Decide on a Loan Type Yourself
I see it all the time – a loan officer or broker will basically put a borrower in a certain type of loan without so much as asking what they’d like.
Not everyone wants or needs a 30-year fixed mortgage, even though it’s far and away the most popular loan program out there.
An adjustable-rate mortgage may suit you, or perhaps a 15-year fixed is the better play. Same goes for FHA loan vs. conventional.
Whatever it is, do the research yourself before the interested parties get involved.
This ensures it’s a more objective choice, and not just a blind, generic, or biased one.
8. Think How Long You’ll Be in the Home
Along those same lines, try to determine your expected tenure ahead of time.
If you know or have a good idea how long you’ll keep the property, it can be instrumental in loan choice.
For example, if you know you’re just buying a starter home, and have pretty strong plans to move in five years or less, a 5/1 adjustable-rate mortgage might be a better choice than a 30-year fixed.
It could save you a ton of money, some of which could be put toward the down payment on your move-up property.
Conversely, if you’re thinking forever home, it could make sense to get forever financing via a fixed-rate product.
And also pay mortgage points to get an even lower rate you’ll enjoy for decades to come.
Definitely take the points question seriously. If you sell or refinance shortly after buying you could leave a lot of money on the table.
9. Understand Mortgage Rates
This one drives me crazy. Everyone just advertises interest rates without explaining them. Where do they come up with them? Why are they different? Why do they move up and down?
These are all important questions you should have the answers to. Sure, you don’t need to be an expert because it can get pretty complicated, but a basic understanding is a must.
This can affect the type of loan you choose, when you decide to lock your mortgage rate, and if you’ll pay discount points.
If you’re simply comparing rates from different lenders, maybe you should take the time to better understand the fundamentals while you’re at it.
This can help with negotiating rates too, as an informed borrower who knows the mortgage lingo will have an easier time making a case if they feel they’re being charged too much.
10. Check Reviews, Get Referrals, and Shop Around
Lastly, do your diligence on lenders upfront, not after applying.
It’s a lot harder to shop once you’ve applied because you won’t want to “lose your place in line.”
You could also lose your deposit if a lender charges you upfront and you go elsewhere.
It’s a lot more difficult to even be bothered applying someplace else once you’ve given someone all your financial information and signed a bunch of disclosures.
Whenever you buy a TV or a car, or even a toaster, you probably put a decent amount of time into research and price comparisons.
You don’t just show up at Best Buy or the car lot and purchase something that day.
With a mortgage, it’s even more important to put in the time since it’s such a massive cost, and one that sticks with you a lot longer. Try 360 months longer.
If you make missteps or fail to shop for a better price, it’ll sting month after month, not just once.
Remember, real estate agents influence lender choice for nearly half of home buyers. Wouldn’t you rather make that choice yourself?
(photo: Javi Sánchez de la viña)
