Getting a mortgage is a big deal and it requires some serious preparation. Before you even apply, it is a good idea to check your credit and get pre-approved.
Having a robust credit score shows mortgage lenders that you can handle debt responsibly, which may result in better terms when it comes to your loan.
1. Check Your Credit
Getting your credit in order is essential to homebuying. Lenders take into consideration your payment history, debt ratio and overall credit utilization when evaluating mortgage applications. If you have blemishes on your credit report, such as late payments or outstanding debt, those can be red flags that cause lenders to view you as a risk. Those with low scores may pay higher rates or be denied a mortgage entirely.
You can check your own credit score for free, and when it comes to preparing for a mortgage application, you should check it often. You can also get prequalified, which means that lenders will check your credit to see if you are a good fit for their mortgages without affecting your credit score (as long as the inquiries happen within a 45-day window). This gives you a chance to compare offers from different lenders and may save you time in the mortgage process.
Mortgage lenders have their own versions of FICO scores, which differ from consumer credit scores. These scores focus mainly on your mortgage history and credit utilization, as well as if you have the right mix of debt types to qualify for a loan.
While the latest scoring models do not consider paid collection accounts, older ones can still count against you. For this reason, it is best to stay on top of your mortgage credit score by regularly checking it with a service like Gravy.
It is a good idea to work on lowering your mortgage credit score before applying for a loan, particularly if you have a credit score in the mid-600s or lower. This can be done by saving up for a larger down payment, reducing your credit card debt or increasing your income, among other things.
2. Get Pre-Approved
The mortgage preapproval process is a great way to clarify your house-hunting budget and to avoid “sticker shock” when comparing home prices. It also demonstrates to sellers that you are serious about buying and can move quickly when finding the right property.
Getting preapproved for a mortgage typically involves filling out an application online or over the phone. This process allows a lender to verify your income and review credit history and credit scores. The lender will issue a letter that specifies the maximum loan amount for which you have been preapproved, based on your financial picture and debt-to-income ratio. It may be helpful to receive preapproval from more than one lender to get a better understanding of the variety of mortgage options available.
Preapproval for a mortgage will likely cause a hard inquiry on your credit report, which will affect your credit score, though the impact is typically short-lived and far less than the impact of other ongoing monthly borrowing (e.g., credit card balances or auto loan payments). You can minimize the impact on your credit by avoiding applying for other loans or increasing your debt balances in the months leading up to the closing of your mortgage.
Once you’ve received a letter of pre-approval, the lender is required to provide you with a three-page document called a Loan Estimate within three business days of receiving your completed application. This paperwork notes whether you have been approved for a specific loan amount, the terms and type of mortgage, estimated interest and payments, and an estimate of closing costs (including lender fees) and property taxes. The Loan Estimate will also specify the amount of the down payment you have provided.
4. Shop Around
Whether you’re buying your first home or refinancing, you may be surprised by how much mortgage rates vary. Getting quotes from different lenders and mortgage brokers can help you find the best deal.
While many people start with their own bank or credit union, there are other options to consider as well. For example, online lenders and community banks can sometimes offer lower rates and fees than larger conventional banks. It’s also worth checking with local real estate agents for referrals to local lenders.
Keep in mind that you shouldn’t apply for any new loans or credit cards while shopping around for a mortgage. This is because each application triggers a hard inquiry on your credit report, which can knock your score a few points down. However, you can continue to pay down existing debt or make payments on time while you shop for a loan.
During the mortgage loan process, you’ll receive lender estimates that detail the interest rate and all charges involved in the loan. It’s important to compare these offers carefully, as the costs can add up quickly. A good place to start is by using our Mortgage Shopping Worksheet, which makes it easy to calculate and compare the total costs of each loan option.
Remember, mortgage rates depend on many factors, including your credit score, income and down payment size. The lowest advertised rate is often based on an “ideal borrower,” which means you might not qualify for that rate without improvements to your credit or additional savings. That’s why it’s so important to shop around and get personalized quotes from lenders. Taking the time to do this can save you hundreds or even thousands of dollars over the life of your loan.
5. Know Your Options
There are a lot of mortgage loan options available to homebuyers. The best one for you depends on your unique situation and goals. Some lenders offer different types of mortgage loans such as interest-only, hybrid, or balloon payment mortgages. Others offer ARMs (adjustable-rate mortgages) with different rules that can change the way your interest rate and payment are calculated.
Also, mortgage rates and fees vary from lender to lender. So it’s important to shop around and get quotes from several different lenders or brokers. When shopping, be sure to ask about all the costs associated with a specific type of mortgage including the interest rate, points and other credit charges. Then, you can compare “apples to apples” when comparing the different loan estimates you receive.
Your credit score and debt-to-income ratio play a big role in how likely you are to be approved for a mortgage. So make sure to pay your bills on time and keep credit card balances low to give yourself the best chance of a good credit report and high enough score to qualify for a low-cost mortgage.
If you have issues with your credit or are worried about getting approved, you might want to consider waiting until conditions in the housing market and the lending industry improve. During this wait period, you can continue to work on improving your credit score and working with the lender you’ve chosen to apply for the mortgage to help ensure your application is a success. You can also consider waiting until home prices decline or interest rates drop, both of which may make it easier to afford a home. Lastly, you can always consult with a local First Bank mortgage loan expert to learn more about our mortgage loan options.