- Know Your Credit Score
Before you even begin to apply for a mortgage loan, you should pull a copy of your credit from all three bureaus. Do not assume that they will all be the same, so be sure to pull a report from TransUnion, Equifax and Experian.
Do this 30 to 60 days before you apply for your loan. Since credit bureaus take 30 days to investigate errors, this will give you time to fix any mistakes. It will also give you time to make some improvements such as lowering your credit utilization.
Keep in mind that your credit score is the biggest influence to the interest rate you pay. Even boosting your score just 20 points could save you 20,000 dollars or more over the course of a typical mortgage loan.
- Get Pre Approved
You need that pre approval letter when making a serious loan offer. It adds weight to your offer and may convince a seller to accept yours over a very similar one without an approval.
- You May Qualify With Bad Credit
With an FHA loan, you may be able to qualify for a loan with a score as low as 500. This will typically require a 10 percent or greater down payment however. Qualify with as little as a 580 credit score for the typical 3.5 percent FHA loan payment.
Keep in mind that FHA loans can be significantly more expensive than conventional financing due to the mortgage insurance requirement.
- Don’t Eliminate 15 Year Loans
A 15 year mortgage might not be as expensive as it seems and it can save you tens of thousands of dollars. Keep in mind that the interest rate will usually be about 1 percent lower on a 15 year mortgage. That can make up for a lot of the additional monthly principal payment.
- Stop Using Your Credit
Once you apply for your mortgage loan, you will need to stop using your credit. No new inquiries, no new accounts and do not put any new debt on credit cards. Your credit profile needs to stay the same until you have your home keys, because your lender will run your credit again before you close. Even the slightest change could affect your approval, so do not take any chances.
- Research Local Schools
One of the biggest factors to consider when making a home purchase is the quality of local schools. If you have kids or plan to have kids, you want to make sure that you will be living somewhere that allows them to get a quality education.
Don’t plan on having kids? Schools should still be on your mind. One day you will likely want to sell your home and if your home is in a good school district, it can sell for a lot more money.
- Don’t Be House Poor
Just because you are approved for a 400,000 dollar loan does not mean that you need to spend every penny of it. Make sure that you calculate that payment and fit it into your budget. The last thing that you would want to do is buy a house and then be unable to afford to furnish it or maintain it properly.
The best thing to do is to sit down and figure out a monthly payment that you can comfortably handle. Make sure that the payment allows you to easily make all of your bills and save money every month. Then, take that payment and let it dictate your maximum purchase price.
- Know That Your Mortgage Will Increase
Your mortgage payment is very likely to increase over time. Home owners insurance will go up every year, HOA’s will raise dues and property taxes will increase. In fact, your property taxes are likely to go up significantly after the first year when the tax assessor uses your sales price to adjust the valuation of the home.
- You Should Shop Your Mortgage
Rates can vary between lenders, so you should not just accept the first offer that you get. Keep in mind that this is a long term high dollar loan. What that means is that even a very slight reduction in interest can save you thousands of dollars over the course of the loan.
- Have Your Paperwork In Order
If there is one thing that mortgages have in common it is that they are paperwork intensive. You will be required to submit all sorts of documentation, so it is best to have these things in order.
Among other things, you will need tax returns, recent pay stubs, bank statements, your marriage license, social security cards and drivers licenses. Gather all of your documents early and have them scanned onto your computer. When your loan processor requests a document, this will allow you to provide it right that second. That will speed up your loan processing tremendously.
- Understand Your Down Payment Requirement
If you are going for a conventional loan, you will need to come up with 20 percent of the purchase price as a down payment. There are other programs however like the USDA or VA loan programs that allow for 0 percent down payments. There is also the FHA loan program which allows for a down payment as little as 3.5 percent.
- ARM’s Can Be A Good Choice
If you plan on being in your home for less than 5 years, an Adjustable Rate Mortgage might be a good choice for you. The interest rate will be lower than a fixed rate mortgage and you would be out of the home before the rate goes up.
Only consider an ARM if you know for a fact that you will sell before that rate changes. If you plan on being in your home for the long term, go with a fixed rate mortgage.
- Do The Math With Points
Your lender will likely offer you the opportunity to buy points. A point is a .25 percent reduction on your interest rate and it will cost you 1 percent of the loan value. If you have a 400,000 dollar mortgage, a point will cost you 4000 dollars.
Points are a great deal as long as you plan on staying in your home. It takes about 6 years to break even on your points, so if you plan on selling earlier, points would be wasted money.
- Understand All Loan Programs
There are a lot of different loan programs on the market besides a conventional loan. If you are a vet, the VA loan program is hard to beat. It allows for 0 percent down without a requirement for mortgage insurance. There are also USDA loans which can get you 0 percent down as well but require you to live in a rural area. Luckily, there are many rural areas close to big cities. FHA loans are also very popular but require 3.5 percent down and expensive mortgage insurance.
Mortgage Loan Tips
Getting a home mortgage loan is an exciting event but it can also be a frustrating process. Most of you will only go through the process a few times in our lifetimes and that means that there is likely much that you know. If you are about to get a mortgage, especially if you are doing it for the first time, here are some tips that will help you on your way.