Many Americans that dream of owning a home find buying or building a home to be a capital-intensive venture. One way you can get to buy your dream home is by applying for a mortgage to finance your purchase. You need to take the right loan to avoid unfavorable loan terms. 

Close to 60% of homeowners in America have a mortgage. They apply for mortgage loans to alleviate the cost of getting their place. However, choosing a lender and getting approved is time-consuming and challenging. 

The application process is complicated for newbies who do not know how to apply for a mortgage. The right information smoothens this process.

Calculate Your Mortgage Budget

You need to determine the loan you can afford and pay comfortably before applying for a mortgage. The convention is that you should use the 28/36 rule.

The 28/36 rule for affordability states that your mortgage payment (inclusive of your homeowner’s insurance and property taxes) should not be more than 28% of your income before tax. It also says that your total debt (inclusive of other loans like student and car loan payments) ought not to be more than 36% of your income before tax.

a man planning finances using calculator

For example, if you and a co-buyer earn $6,000 per month, your maximum housing payment will be $1,680 every month (28% of your gross income). You can pay this amount with ease every month. The total debt you are servicing every month should not exceed $2,160 (36% of your gross income).

However, the 28/36 rule is not always used to determine how much mortgage you can pay quickly. Some lenders allow borrowers with high credit scores to have a higher debt-to-income (DTI) ratios.

Interest rates and your spending habits also affect your affordability of a mortgage. A lower interest rate reduces your monthly repayment amounts. If you have a bad spending habit, you will struggle to repay your mortgage.

Budgeting is a critical step before applying for a mortgage. It makes homeownership more manageable as you will not struggle to repay the loan. It also permits you to cope with unexpected expenses and emergencies that require you to spend.

Get Your Credit Report and Scores

It is a good idea to obtain your credit scores and report before you apply for a mortgage loan. It only takes a few minutes, yet some future homeowners assume their credit ratings are high enough. You can check your credit report with the leading agencies (Experian, TransUnion, and Equifax). 

Platforms like annualcreditreport.com provide a free copy of your credit report per agency annually. If the home acquisition will take time, take advantage of service providers that give regular credit report monitoring. 

Many of these organizations charge you a monthly fee of around $20, and you can cancel the subscription once you purchase your home. You need to have a credit score of at least 680. However, it should be preferably 700 or higher. 

If you have a score lower than 680, you may need to improve it before getting approval to take up a mortgage. You will have a higher mortgage rate if your credit score is low. Therefore, a high score saves you a lot of money since you will have a lower mortgage rate.

The FHA loan can be ideal for those with credit scores that are below 680. Home Loan Learning Center suggests that those with a credit score of up to 620 qualify for these mortgages. While these federal loans accept lower credit scores and lower down payments, they have high additional costs.

Look for Errors in Your Credit Report

A study by the FTC found that 25% of U.S. consumers noticed at least one error that affects their credit ratings in their credit reports. Additionally, 20% of these cases were genuine, and a credit bureau rectified them.

Mistakes in your credit report and scores happen. They can lead to lower credit ratings, which affect your ability to apply for a mortgage loan and to get pre-approved for a mortgage loan. Therefore, you need to be careful with what is in your credit report. 

In Case You Identify a Mistake in Your Credit Report, You Should Take the Following Actions.

1. Contact the Credit Bureau 

You should send a letter to the bureau that produced your credit report once you identify any error on it. You can dispute inaccuracies on your credit report with any of the leading credit bureaus via mail or online. 

In your correspondence, provide your contact information and explain the error(s). You should also include supporting documentation. Retain a copy of the documents or letter that you mail.

2. Contact the Data Providing Organization

It is advisable that you contact the organization that availed your data to the credit bureau. Your credit card issuers and banks can be the ones responsible for the errors. At times, visiting the organization in person saves you time. 

The credit bureau will relay the dispute you raise to the relevant organization. However, you should contact your credit bureau first for identity-related mistakes. The bureau owns up to these issues, and they correct them without reaching out to any other entity. 

Additionally, check with the other two leading bureaus to confirm that the mistake is not on their reports.

3. Wait for 35 Days For a Response

The bureau often takes 30 days to investigate any disputes they get and verify the information with the data organization. They need to provide you with feedback within five days of concluding their investigations. 

The data providing organization is also obliged to investigate your issues in about 30 days. They should make the necessary corrections once they complete their inquiry. However, if they stand by the accuracy of their information, they will not remove or update the error.

4. Review the Results 

The credit bureau provides you with the results of their investigation. If they made a mistake in your initial report, they rectify it and offer you a new credit report for free. In case they do not make any corrections, do not dispute the feedback without additional information to back your claims. 

They may deem it as frivolous without any investigation. The data providing organization should inform the bureau to rectify any inaccurate information they sent them.

5. Check Your Credit Report for Updates

Rectifying inaccurate information takes time. The period for correction depends on the specific bureau’s update cycle, and the time it takes the data providing information to send new information to the bureau. 

If the relevant corrections are not made months after your dispute, contact your data providing information and the credit bureau to verify that they are dealing with accurate information. 

Improve Your Credit Score

Your credit score is one of the critical factors that determine whether or not you get pre-approved for a mortgage. It also affects the rates you will have to pay. 

Consequently, you need to ensure you have ratings that are high enough to qualify for pre-approval and save some money with your mortgage.

You can take several measures to improve your credit score. If you want to improve your credit ratings, you should try these measures.

a. Ensure You Are Up-to-date With All Your Payments 

Staying current with your payments like loan and credit card payments leads to a positive history, which improves your credit standing. Additionally, respond appropriately to your collection letters on time.

b. Have a High Credit Utilization Ratio

Your credit utilization ratio refers to the credit available to your cards. It makes up about 30% of your credit ratings. You need to pay your balances to have a high credit utilization ratio. Paying your credit can lead to an increase of about 50 points on your credit score.

c. Do Not Open New Accounts or Apply for Credit 

Getting a new account or using for a new one leads to a hard inquiry, which affects your credit ratings. This inquiry happens whenever you grant a creditor permission to get your credit report. You should hold off on getting them if you intend to apply for a mortgage loan. 

d. Do Not Close Any of Your Old Accounts 

Once you get your credit report, you may be tempted to close the old accounts that you have not used for various reasons. The average duration of your open accounts affects your credit ratings. You score highly if your lines of credit have been operational for long.

e. Have a Mix of Loan and Credit Account Types

You can increase your credit ratings if you hold many different accounts. You should have store cards, auto loans, and personal loans to maximize your credit standing. However, ensure that you are paying them well, and you are almost clearing them before you apply to get pre-approved for a mortgage.

f. Become an Authorized User

You should get a friend or family member with a high credit rating to add you as an authorized user. The credit bureaus add this account to your credit history. FICO algorithms consider authorized user accounts in their algorithms. 

Therefore, being granted access to an account with a good standing that has been operational for a long time improves your credit ratings.

Check Your Savings

Many lenders reject mortgage applicants that do not have any cash. Many lenders are cautious and you need to make a down payment before they give you any loan for a home. The down payment minimums often vary. The payments depend on factors such as the lender and the type of loan you need. 

Image of a man saving coins in a jar

However, you should have at least a 4% down payment. The higher your down payment, the lower your mortgage balance and the lower your private mortgage insurance (PMI). Lenders attach PMI to properties that do not have a minimum of 20% equity. 

Paying it will increase your total mortgage, which affects your monthly payments. Consider additional payments you will need before sealing the deal. Other expenses involved include home appraisals, closing costs, title searches, application fees, credit report fees, and home inspections. 

Add these costs to the total cost of home-ownership, and check where you can save before applying for a mortgage.

Prepare Your Documents

You should get your documents in order before initiating the mortgage application process. This action gives you ample time to prepare and ensure you have every documentation in order before starting the loan acquisition process. 

You Should Be Ready With the Following Documents.

  1. Social Security Card – lenders use your Social Security number to verify your identity. However, this number is not enough for those that did not get them at birth. This group often needs additional documentation to prove their identity.
  2. Two Years of All W-2’s – obtain these documents from your employer. The lender may also ask for new W-2’s that become available during the mortgage application process. If you have gaps in this period, the lender may request a written explanation. 

The IRS also permits you to get a copy of the W-2’s that you submit with your tax returns.

  1. Two Years of Previous Tax Returns – lenders may request you to sign the IRS Form 4506-T. This document gives them access to your tax returns from the IRS. They need this permission to confirm that your income has been consistent for a long time. 

File your taxes before applying for a mortgage to avoid being denied one because of not being up-to-date with your taxes. 

  1. Driver’s License – lenders may ask for you to provide this document. It will prove that you are who you claim to be. Your picture and information can help them verify that you have provided them with your accurate information.
  2. Two Months of Bank Statements – lenders may ask you to provide them with your bank statements to assess your risk profile. They may also ask for your investment assets and any insurance policies you have taken. 

These documents can show lenders that you have a reserve mortgage payments for several months in the event of an emergency. Additionally, they check for consistency in your deposits. They are likely to deny your application if the deposits showed up as a lump sum. 

You can download your bank statements or get them via mail. In case you have large deposits, the lender may request documentation explaining the origin of the funds.

Find A Lender

Once you have made the necessary arrangements, you need to find a lender. This process is not as straightforward as you may think. 

However, You Can Find a Lender Easily by Following These Steps:

1. Choose the Right Mortgage for You

There are different mortgages available for future homeowners. The federal government insures some while others qualify for sale to entities sponsored by the government. Others do not fit in these categories. These loans have different loan terms and qualifying requirements. 

  • The Government Covers VA Loans, FHA Loans, and USDA Loans. Lenders have low down payment and pre-approval criteria since the insurance covers them against defaulters. They also have lower interest rates.
  • Conforming Loans Comply With the Regulations Set by Freddie Mac and Fannie Mae, Which Are Entities Funded by the Government to Buy Mortgages from the Market. The guidelines outline rules for qualification by lenders, down payment requirements, and the maximum mortgage limits. Only a few lenders offer this type of loan.
  • Non-conforming Loans Do Not Meet the Guidelines Set by Fannie Mae and Freddie Mac. Consequently, lenders cannot sell them quickly.

2. Research the National Average Mortgage Rates. 

Identifying a reasonable mortgage rate is critical before looking around for a lender. You can find it from sources like the Federal Housing Financing Agency. Knowing this average helps you disqualify lenders offering rates above the market average.

3. Compare Mortgages from Lenders. 

You need to compare the various options that lenders offer before picking one. Use online programs to find lenders and compare their offers. 

You Should Look at the Following:

  • Interest Costs – some state their interest rates using APY, which represents the actual interest you will pay after accounting for the frequency of adding interest to the principal. Others describe it using APR, which represents the interest you pay annually without considering compounding. APR is usually lower than the APY.
  • Points – they reduce the interest rate you pay on your loan. Each point costs 1% of your mortgage and reduces your interest rate by a rate prescribed by the lender.
  • Origination Costs and Loan Fees – ensure your lender offers some of the lowest amounts. Inclusive of charges such as those for credit checks, appraisals, origination fees, and others.
  • Loan Termconsider the duration of the loan. Many borrowers take loans for 15 and 30 years. The credit for 15 years has higher monthly payments and a lower interest charge.
  • Adjustable or Fixed Rate – fixed rate option has fixed monthly payments and interest rate while those of adjustable-rate options vary with market conditions.

4. Research the Lenders’ Reputation

You need a lender that values their customers. Their qualification criteria, closing period, and customer service should be reasonable. Your lender is likely to sell your mortgage. You should ensure they are fair from the start. 

This fairness will ensure you are in the right hands from the beginning, even if your loan ends up with another entity. 

Get Pre-Approved

Getting pre-approved is different from pre-qualification. Pre-approval means a lender has looked at your documents, verified them, and approved you for a specific amount of mortgage. The approval is usually valid for a particular period. 

The approval lasts 60 to 90 days. Buyers that get pre-approved before looking at homes are at an advantage. They know their budget and avoid loving a house that is beyond their means. The obvious question you have now is, how can I get approved for a mortgage? 

The pre-approval process is simple. Contact a lender or multiple lenders at the same time, submit your personal and financial information and then wait for a response. Pre-approval notification includes your mortgage maximum and the interest you will pay for the mortgage. 

Once you get your pre-approval letter, you will access the credit as soon as the seller accepts your bid.

Generally, the Criteria for Getting Pre-approved Consists of the Following: 

  1. Provide a proof income like W-2’s, alimony checks and pay stubs
  2. Avail proof of assets like an investment account and bank statements
  3. Have a good credit standing
  4. Provide all the other documents required by the lender, such as your Social Security number, signed Form 4506-T, and driver’s license.

You will get pre-approved fast if you cooperate with the lender. 

Start Hunting for Your New Home

Once you are pre-approved, you can begin hunting for your new home. You will have an easy time with many buyers you talk to since you will both know there are funds available for the purchase. Some agents only offer tours to buyers with a pre-approval letter. 

Home For Sale Real Estate Sign and Beautiful New House

You do not have to worry as you have the means to make the purchase. 

Which Type of Mortgage Should I Get?

There are mainly two types of mortgage that are available for future homeowners. The choice you make affects your borrowing cost significantly. 

The Options You Have Include:

  • Adjustable-Rate Mortgage – these loans offer varying interest rates. They typically begin with a lower interest rate compared to the fixed-rate mortgage. The payments and interest rates are adjusted down or up, depending on the prevailing market conditions.

You have the option of refinancing the ARM loan to a fixed-rate mortgage to stop the monthly payments from fluctuating. You can use this type of loan if you are open to these fluctuations.

  • Fixed-Rate Mortgage – with this loan, you have fixed monthly payments, and the interest rate is constant throughout your repayment period. Borrowers with this loan enjoy the predictability and comfort of fixed monthly payments. 

The conventional loans in this category are the 15 or 30 years of mortgage options. However, specific lenders provide loans of shorter or longer periods. You can take this mortgage if you want to have fixed payments throughout the mortgage period.

Final Thoughts

The keys to a rewarding mortgage application journey are within reach. You only need the right financing to undertake this journey without struggling. Applying for a mortgage and getting pre-approved are important steps to take in the home purchasing process. 

Before your application, calculate your budget to know the home you can afford. Obtain your credit reports and scores and ensure that their information is accurate. You need to correct any discrepancies as soon as possible as they affect your credit standing. 

If your scores are low, take measures to improve your status as lenders deny applicants with low credit scores. Choose the right lender and get your pre-approval. Agents prefer home shoppers with a pre-approval letter as they have proof, they can finance their purchase. 

You also need to choose the right type of loan. ARM loans can save or cost you money as your monthly payments and interest rates are subject to market conditions. A fixed-rate loan is predictable as your interest rate, and monthly payments are constant. 

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