Know Your Loan Programs
Before you apply for a mortgage loan, know the different loan programs that may be at your disposal. Not every mortgage broker is going to be up front with what program might be best for you. They might simply want to work with the programs that they are familiar with and that close the easiest. Your main government backed programs will be FHA, VA and USDA.
The FHA loan program allows borrowers to purchase a home with as little as 3.5 percent down and a credit score as low as 580. The catch is that you will pay heavily in mortgage insurance. Initially, you will pay 1.75 percent of the purchase price and annually, you will pay as much as 1.05 percent of the loan balance.
If you qualify for a VA loan, you should probably be taking it. This government backed loan will allow you to purchase a home with 0 percent down and a credit score of as little as 580, although the VA does not specify a minimum. In addition, unlike an FHA loan there is no costly mortgage insurance.
A USDA loan allows borrowers in rural areas to get a 0 down loan with a relatively low credit score. Although the USDA does not set a minimum score, most lenders will require a score of 620 or higher .This loan also requires mortgage insurance, but it is less expensive than what you would pay with an FHA. If you don’t like the idea of living in the country, you will be thrilled to hear that 97 percent of the US land mass is considered rural.
Have Your Documents Ready
Prepare all of your documents well ahead of time. You should have 2 years tax returns, 2 months of pay stubs, 6 months of bank statements from every account you hold, social security cards, drivers licenses, recent rental history, and statements about any monetary gifts you may have received. Gather all of these documents and then scan them onto your computer.
Your lender may not ask you for all of these documents in the beginning, but being prepared is a good idea. If a mortgage processor requests something later in the process, you will be able to respond quickly and things will run much smoother.
Stop Using Your Credit
If you are getting ready to apply for a mortgage, do not apply for any new credit. You should stop using your credit at least 3 months before applying, but 6 months would be even better. The idea is to show a stable credit history.
Once you are approved for a mortgage, nothing changes. Continue to avoid applying for new credit and try not to increase any of your credit card balances. If you use your credit before signing your loan, you are asking for trouble. Best case scenario would be that you have to explain a few things. In the worst case, you could harm your interest rate or even cause your loan to be denied.
Pay Attention To Your Escrow
Your lender will estimate what you need in your escrow account, but they will do so using outdated information. They will use last years property tax record to estimate how much you need in your escrow. The problem with this is that your taxes will almost certainly be going up.
If you are buying a preexisting home, the tax assessor will use the sale as an opportunity to bring the home value up to market level. For an existing owner, the property value can only be raised so much per year. This means that the last owner was likely not paying taxes on the full value of the home.
On a new construction, a lender will often base the taxes off of the value of unimproved land. Once your house is built, the property value will rise and so will your taxes.
Pay attention to your escrow balance and consider paying more money each month towards escrow. This will keep you from having an escrow shortage which could cause a significant increase in your monthly mortgage payment.
Have Your Home Inspected
Your lender will require a home appraisal, but they will generally not require a home inspection. You should strongly consider paying for one, especially sine you only need $300 to $400 to pay for it.
A home inspection can reveal a number of problems from water leaks to bad wiring. These are things that will eventually make themselves known, but it may take you months to discover them, after it is too late.
If you get a home inspection, you can negotiate with the seller to have the repairs made before you close. It can potentially save you thousands of dollars in repairs that you would otherwise be on the hook for.
Even if you are building a home, an inspection is still a good idea. Building contractors make mistakes all of the time and city or county inspectors do not always catch the problems. Yes, your new home likely has a warranty, but some building mistakes can take years to reveal themselves.