Buying a house is an exciting process. From the various emotions that come along with creating a home to the overwhelming amount of financial responsibilities, it is easy to see how stress is a part of so many buyer's lives. Of course, applying for a mortgage that is suited to your needs is one of the most complicated processes of the buying process. Thankfully, proper education and planning will ensure you qualify for an affordable method of financing your home purchase. Using this guide, you will learn the key steps to take before applying for your mortgage.
Check and Fix Credit
If you do not have any credit or your credit score is low, lenders will not approve you for a loan. In addition, if your credit score is not high enough, you will most likely not qualify for a low, affordable interest rate. Therefore, before you even contact a lender, you should check your credit score.
It is important to note that most lenders base an approval off of your credit score. A credit score of 700 or higher will earn you the best interest rates. If your score is even a few points below that, you will need to pay a higher amount of interest, which will increase your monthly payment.
Many factors influence your credit score. Your score will be lower if you have high balances on your credit cards or you have missed payments. In some instances, you may not even realize you have negative issues on your credit report, so checking before you contact a lender is a smart decision.
To improve your credit score, consider paying down balances on your credit card. Finding the cash to complete this chore may be difficult to do especially if you want to put more money down on your home, but it will help you earn a lower rate, which can save you money over the course of your home loan.
If you have any collections or charged-off accounts, contact the company to arrange a payment in the hopes of them removing the negative connotation on your credit report. A charged-off account with a zero, paid balance is better than a charged-off account with an outstanding balance.
Once you pay down balances and repair any credit issues you have, you should put aside money for your down payment. Today, it is difficult to find a lender that will approve a mortgage without paying a down payment or closing costs. Also, you will need to save money to pay appraisal fees and inspections before closing on the house.
The exact amount you will need depends on a few factors including the type of loan you receive and the total price of the home.
Placing 20 percent of the home's total price down on a home is ideal because the less you finance, the less your mortgage payment will be each month. However, 20 percent down can be overwhelming for many buyers.
Today, more and more buyers are taking advantage of FHA loans, which require 3.5 percent down or traditional conventional loans with 5 percent down. With the different loans available, you should be able to find an option that works with your budget.
Once your credit is in good condition and you have your down payment ready, you can contact a lender to begin the preapproval process. During the preapproval, lenders will use calculations to determine how much home you can realistically afford. For your lender to preapprove your loan, you will need to provide them with a great deal of information.
Pay stubs and other statements showing your income are essential. If you are purchasing a home jointly, your joint applicant will also need to provide these statements. Tax returns from the last few years may also be necessary. Your lender will also pull a recent credit report showing your current loans, balances, and monthly payments.
Using this information, the lender, a place like FCN Bank, will be able to determine if you qualify for a loan. Once you have this preapproval, you can begin searching or make an offer on a home you are already interested in.