Before you apply for a mortgage, do these six things

If you only read this paragraph, we hope you’ll take away this one, must-have lesson for homebuying: it’s an extensive process and we recommend a thoughtful, measured, step-by-step approach. The more time you invest in preparation and careful consideration, the more you’re likely to enjoy the result of your home purchase.

What are some of these preparations? Let’s begin.

Prefer a personalized consultation to get you started? We’re here to help – contact one of our MLOs today.

1. Check your credit score

Your credit score plays a huge role in your home loan as it’s a reflection of your ability to handle money and pay debts in a timely manner—all of which are important to lenders. People with better credit scores can also gain lower interest rates, which can lower monthly payments. In general, the higher your score, the better.

Getting your credit score is easy. Federal law entitles you to one free credit report annually from AnnualCreditReport.com. Their report will include scores from the three credit reporting agencies (Experian, Equifax and TransUnion). We also recommend checking out each site just to familiarize yourself with reporting agencies (sometimes they offer free reports as well).

Once you receive your report, review it carefully.

• What is your credit score? If you plan to apply for a conventional mortgage, you’ll need a score of 680 or more. However, your score can be lower for other types of loans like a FHA, VA, USDA or NIFA loan.
• Is the information correct? If not, now is the time to correct any mistakes that appear in your report. Visit the Federal Trade Commission’s page to learn how to dispute errors on your credit report.
• Do you need to make improvements? If your score is lower than you’d like, consider making a few spending changes to improve your score. Experian and Equifax explain further in these blogs on gaining a higher score. 
  
  

2. Determine how much you have for a down payment

Your down payment is essentially the first payment of your home’s selling price. The more you can put down, the more you can reduce your home loan, which then reduces your monthly payment. Depending on your income and recommended loan, a down payment can be as low as 1.25% for a VA loan or 20% and more for a conventional loan.

Knowing your down payment can also help your mortgage loan officer recommend a loan that fits your needs. Knowing your down payment will also help you determine a home price and monthly payment that suits your income.

Down payments can come from savings you’ve put away, the equity in a home you’re selling and even a gift from a relative or friend. Some people can also qualify for a down payment grant.

We know it can be tempting to stretch your dollars to get a lower monthly payment. However, it’s important not to dip into your emergency fund and leave yourself without a safety net. Like we said before, a careful, measured approach is always the way to go.

3. Figure out your real monthly expenses to estimate an ideal home payment

So, credit score: check. Down payment: check. Now let’s add up your potential monthly expenses so you’re not surprised down the road.

Mortgage insurance. If you plan on getting a conventional loan, but are unable to put 20% down, you’ll need to have mortgage insurance. Your lender can help you determine the additional monthly cost. Not all loans will require mortgage insurance and your mortgage loan officer can help you determine what type of loan is right for you.

Utilities. Age, design, square feet and occupants all play a factor in how much you can expect to pay for water, gas and electricity (let’s not forget about garbage, either). Some utility companies will provide a 12-month average cost for a specific property, which makes it easier to calculate your monthly expenses.

Home insurance. Plan for the big “uh-oh” with a solid home insurance policy. In the Midwest, we’re almost guaranteed to have occasional extreme weather and the more you can plan, the better. Call a few reputable insurance agencies and ask for a no-obligation quote.

Non-home monthly expenses. Add it all up—groceries, insurance, cable, internet, subscriptions, clothing, haircuts, gym memberships, health care, the costs of owning a pet, vacations, planned gifts, fuel and others (be sure to look at the monthly and yearly cost for a big picture view). Did you get it all the first time? It’s always a good idea to take a second look.

Home maintenance. Homes, like all things, will eventually need updates and repairs. Multiple sources, like bobvila.com, suggest setting aside 1–4% of your home’s value every year for maintenance. You may not spend that much every year, but setting that money aside will help with expenses that eventually happen (air conditioners only last for so long).

It might take a little work to track down these numbers, but it’s time well spent. You’ll have a highly detailed look at your potential monthly expenses and have a better understanding of how much house you can afford.

4. Figure out your debt-to-income ratio (DTI)

Your DTI is the percentage of your monthly income that is used to pay your debts. It’s also used by banks to determine if your income and debts are in a range that will also support a home loan. Most lenders look for a DTI of 43% and below. A mortgage loan officer can help you do the math or can follow this formula:

• Add up your monthly debt payments (these do not include monthly expenses)
• Then find your monthly income before taxes (gross income)
• Then divide your monthly debt by your gross income
• Then multiply the result by 100 to get your DTI as a percentage.

5. Get your paperwork together

Your lender will want proof of your current financial standing, including income, debts, savings and investments. Common documents include:

• Identification information (social security number, birth date, full legal name)
• Residence history (current and previous two years)
• If you are a renter, include the landlord or management company contact information and be able to show you have made rent payments on time for at least one year
• Employment history (current and previous two years—include company names, addresses and your title)
• If you are self-employed, provide a profit/loss stamen for the current and previous year
• Tax returns and W-2s (previous two years)
• Pay stubs (last two months)
• Other income
• Bank, investment and retirement account statements (last two months)
• List of other assets such as autos or other property
• List of monthly debt obligations (use the list you created to figure out your DTI)
• Written explanation of any derogatory information on your credit report
  
  

6. Find a bank you’re comfortable with

Buying a home is one of the largest purchases you’ll ever make—that no one trains you for. There are plenty of online guides, but experience is always a better teacher, which is why it’s important to find a bank and mortgage loan officer to help you at every step. You WILL have questions. Then you’ll have even more. And we take the extra steps to make sure you feel comfortable and knowledgeable throughout the process.

Articles contained in our news section are not intended to provide recommendations or specific advice. Consult with a professional when making financial decisions. Once published, articles are not updated; information may be outdated.