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Buying a home is a massive step towards financial independence and achieving the American dream. However, you might have to say goodbye to that dream if you don’t get approved for a mortgage and can’t pay in cash. So, what can you do to ensure you get approved? Well, several factors can determine whether a bank will grant you a mortgage loan or not. Organizing your finances in advance can increase the chances of getting a positive answer from the bank. That’s why, in the rest of this article, we’ll cover some of the things you should do before applying for a mortgage to help you buy the house of your dreams.
Mortgage: Everything You Need to Know
A mortgage, or a home loan, is an agreement between a borrower and a bank to lend money in exchange for a piece of property. Most people can’t buy their house entirely in cash, so this is the only shot they have. More importantly, a mortgage allows people to pay off their homes in monthly installments over decades according to the agreed-upon terms. However, if they miss a few payments, the bank could end up seizing their property.
Another thing you should know is that there are different types of home loans. Aside from conventional mortgage, there are also FHA and VA loans. Moreover, a USDA Home Loan is a great loan option open to qualified buyers in rural and suburban areas. Finally, you wouldn’t ever hear about the crypto mortgage – a special mortgage that enables you to borrow money for a house using your cryptocurrency holdings. Before making your choice, it’s essential to gather all the information to determine what type of mortgage will be appropriate for you.
Before Applying for a Mortgage
As we have already said, there’s a list of things you should do before applying for a mortgage. In most cases, the following items will increase your chances of getting approved for a loan and buying your dream home:
2. Credit score
5. Mortgage rates
6. Down payment
1. Pay Off Your Debt
The first step you need to take before applying for a mortgage is to sort out your debts. As you probably know, having a copious amount of debt can negatively impact your ability to get approved for a mortgage.
Once you apply for a mortgage, lenders will start looking into your accounts to determine how much you can afford each month. While considering your case, they’ll look at your complete monthly income and all your expenses. This includes all your household bills and other fun expenses like dining out, shopping, and gym memberships. Moreover, they also consider all outstanding debts, such as loans, credit card balances, and overdraft fees.
Simply put: the more you borrowed in the past (without paying off), the less you can borrow now. And, the less debt you have, the more you can borrow now.
2. Check Your Credit Score
While it might seem like the most obvious advice ever, there is a genuine reason behind this step. Your credit score is a crucial, if not the most critical, factor in approving a mortgage. Additionally, fixing credit-related issues takes a lot of time, so if you want to succeed, you shouldn’t postpone it until the last moment. It would be best to get onto it as soon as possible. Thanks to easily available websites, it’s now quite simple to check your credit scores and reports for free in a matter of minutes.
Higher credit scores are often rewarded with lower mortgage rates, which translates to cheaper monthly payments and plenty of interest saved. This might also save you a ton of money. On the other hand, if you have a poor score, try to figure out a plan to fix it as soon as possible before applying for a mortgage. Registering to vote, making on-time payments on your bills, and fully paying off your credit card each month are easy ways to improve your credit score. Closing any credit accounts that you no longer use can also be beneficial.
3. Do Your Homework
The word ‘homework’ might leave you with a bad taste in your mouth, but this time it is necessary. To get the best deal possible, you must research loans and rates extensively. If you don’t think you can do it by yourself, consult with a broker. Your broker will help you get the best price by comparing all the available mortgages. Moreover, brokers may access exclusive offers that banks and building societies do not make public. This can be especially helpful if your situation is a little convoluted. For example, it’s beneficial if you’re self-employed, a senior, or have a bad credit history.
Buying a home is all about research. First, as you already know, you have to research all mortgages. Then, you’ll start house-hunting and exploring the best neighborhoods for you and your family. However, even after buying your dream house, the research part isn’t over! You’ll also have to read up about reputable movers in your area to ensure you hire the best ones. And, if you end up on a tight deadline, where you have to pack fast, you’ll have to find ways to get everything ready quickly by utilizing helpful packing tips to pack your entire home in as little time as a week.
4. Organize Your Paperwork
After we’ve covered the research and credit score, it’s time to discuss paperwork. What many people don’t realize is that paperwork is second only to credit in importance. You’ll need the papers for your down payment, closing expenses, and reserves, the latter of which proves to the lender that you have extra cash available in case things go wrong. But, what many people forget is that having the funds is one thing; documenting them is quite another.
There are several documents you’ll need for your mortgage application, whether they are in digital or traditional form. For starters, you’ll need a photo ID and up to six months’ worth of bank statements. You’ll also need to provide evidence that you have a stable source of income. You can do this by supplying your paystubs if you’re employed. If you’re self-employed, you’ll also need to present the lender with your tax returns and business accounts that an accountant has approved.
5. Double-check The Mortgage Rates
The interest you pay on the loan is expressed as a mortgage rate. Simply put: it’s the fee you pay to borrow the money. You’ll most likely have to choose between a fixed-rate agreement, a tracker, and an interest-only option. There are numerous factors you have to take into account when choosing. For example, your home loan will be more affordable over the course of your life if your loan has a lower interest rate. And, if you take out a considerable loan, a few percentage point differences can add up to thousands of dollars annually.
In the end, picking out mortgage rates is not only a matter of money. Making the correct decision about the mortgage type for you will directly impact your flexibility and future options.
6. Save For a Down Payment
You should start setting aside your excess money for a down payment as soon as you start thinking about purchasing a new home for you and your family. Working toward a larger lump sum payment at the beginning would only help in this process. This is important because some lenders require a 5% down payment for mortgages, but the more you save, the less money you’ll need to borrow.
If you need help figuring out how much you need to save, you can easily find one of the many online Loan to Value calculators that will display the amount for a down payment when you enter the price of the home. If your Loan to Value (LTV) percentage is even lower, lenders will consider you less risky, which means they might be willing to give you a better deal. This is because your property is less likely to experience negative equity the lower your mortgage is. When this happens, the value of your home is less than what you owe on your mortgage.
If you put down more money and have more equity in your home, the lender will be more confident that they’ll get their money back. Additionally, it’s a good idea to set aside money for future cosmetic upgrades or repairs. Remember that these changes involve additional charges for removal, building insurance, appraisal, survey, land registry, and legal fees.
Bonus Advice: Get Pre-Approved
Getting pre-approved for a mortgage loan and locking in your interest rate might speed up the home-buying process if your finances are in order. So, if you can, try to get pre-approved for a mortgage. This will increase your appeal to house sellers, and you’ll be demonstrating to them that you’re a serious, qualified, and prepared buyer. It will also give you bargaining power and help speed up homebuying.
You’ll need the following to get pre-approved for a mortgage: evidence of your assets and income, strong credit, employment verification, and any other paperwork your lender may ask for.
Things You Should Avoid Before Applying for a Mortgage
Since we mostly covered the things you should do before applying for a mortgage, let’s now get into what you shouldn’t do. These things will decrease your chances of getting approved for a loan since the lender might see you as a liability:
1. Changing your job
2. Huge purchases
3. Marrying a person with a bad credit score
4. Co-signing the loan
1. Switching Jobs
Your chances of being approved for a mortgage may be harmed if you change careers a few weeks or even days before meeting with a lender. A lender will want to be sure that you have a reliable source of earnings and the means to cover your monthly mortgage payments. If you’ve just started a new job, you might have trouble proving your income by showing your pay stubs. This could be a potential problem and a definite red flag to your lender.
2. Making a Huge Purchase
A significant purchase, like new furniture or a car, can cause a lender to deny your mortgage application. When buying a home, you’ll need enough cash to cover the down payment, insurance, and closing costs. Additionally, if making that purchase necessitates borrowing money or using a credit card, it may impact your credit score if you cannot pay the entire bill on time or if your percentage of debt increases.
3. Marrying Someone With Bad Credit
After getting married, it’s usual for couples to purchase a property. However, keep in mind that if you’re putting your finances in order, both your credit ratings and financial histories may be taken into consideration. Before attempting to obtain a mortgage, it could be a good idea to work on raising your future spouse’s credit score.
4. Co-signing On a Loan
If you’re looking to buy a home, it’s vital to think twice before agreeing to co-sign a loan for a college-bound child or another family member. You share some of the responsibility for that loan if you co-sign. If the borrower cannot make timely payments, her credit score may suffer greatly.
Buying a house is a huge decision that shouldn’t be taken lightly. Since you’ll most likely need a mortgage, make sure you first do your research and fix your credit score. Your lender won’t be as careless as you might think. Trying to get approved without preparing for it might end up exposing red flags in your credit history and getting you rejected. So, before applying for a mortgage, do everything on this list to increase your chances of getting a home loan for your dream home. In the end, remember that sometimes you can do everything right and still get rejected. Don’t take it too hard. Instead, continue working on fixing up your downfalls until you get accepted.
Meta: Are you considering buying a home and getting a mortgage? Find out all the things you should do before applying for a mortgage.
Photos used: https://www.pexels.com/photo/crop-businessman-giving-contract-to-woman-to-sign-3760067/