How to apply
for a mortgage
Applying for a mortgage is pretty straightforward.
You’ll choose a lender, start the application (typically online), and provide supporting documents like tax returns and bank statements to verify your finances.
After that, it’s mostly a waiting game. Underwriters will check your credit and documentation, then decide whether to approve you. If everything checks out, you’ll set a date to close the loan — usually within 30-40 days.
The most important thing is to apply with more than one lender. You should apply with at least 3-5 mortgage companies to make sure you’re getting the best deal.
Luckily, many lenders now offer
online applications, so the process is much faster and simpler than it used to
be.
Start your mortgage application today (Feb 11th, 2021)
In this article (Skip to…)
5 steps to a
successful mortgage application
When you apply for a mortgage,
you’ll be assigned a loan officer to guide you through the application process
and paperwork — so you don’t need to worry about navigating everything on your
own.
As the borrower, your main job is
to set yourself up for success.
You want to provide your mortgage
lender with the strongest application possible in order to widen your loan
options and lower your interest rate.
To apply for a mortgage in the
right way and improve your chances at getting a great deal, you should:
- Check your credit report for errors and raise your score if possible
- Apply with multiple lenders to find the lowest rate and fees
- Get pre-approved for a mortgage before making an offer on a house
- Avoid late rent payments; these can affect your mortgage eligibility
- Avoid financing expensive items before closing, which can reduce your home buying budget
Here’s what you need to know at each stage of the process.
Check your mortgage eligibility (Feb 11th, 2021)
1. Check your credit before you apply for a mortgage
If you’re waiting until you apply
for a mortgage to check your credit, you’re waiting too long.
That’s because mortgage interest rates
— and mortgage qualification — depend on your credit. And the stakes are pretty
high.
If you check your credit when you apply and
find out it’s lower than you thought, you’ll likely end up with a higher interest
rate and more expensive monthly payment than you were hoping for.
If you find out your credit score
is really low — below 580 — you might not qualify for a
mortgage at all. You’ll likely be out of the home buying game for another year
or more as you work to boost your score back up.
Small changes can make a big difference
Keep in mind, a higher credit score usually means
a lower mortgage rate. So if you check your score and learn that it’s strong,
you might still want to work on improving it before you buy.
Consider that mortgage rates are based on credit “tiers.” A higher credit tier means a cheaper mortgage.
If your credit score is currently 719, for example, raising it just one point could put you in a higher tier and earn you a lower rate.
Check your credit early
Ideally, you should start checking
your credit early. It can easily take 12 months or more to reverse serious
credit issues — so the sooner you get started, the better.
You’re legally entitled to free
copies of your credit reports each year through
annualcreditreport.com. These
reports are vitally important because they’re the source documents on which
your credit score is calculated.
Yet one study found that as many
in one in five
reports contain errors that are serious enough to affect a consumer’s
creditworthiness.
So you need to crawl yours, making
sure they’re 100% accurate. The Consumer Financial Protection
Bureau has useful advice for disputing errors.
Raise your credit score before you apply if possible
If your reports are accurate but
your score is lower than it could be, work on it. There are three things you
can do immediately to become a better qualified borrower:
- Keep paying every single bill on time
- Reduce your credit card balances — If they’re above 30% of your credit limits, you’re actively hurting your score. The lower the better
- Don’t open or close credit accounts — Wait until after closing
Those three action points should
help your score over time. You can also read our Guide to improving your credit score.
Check your mortgage eligibility (Feb 11th, 2021)
2. Apply for a mortgage with multiple lenders
It’s a huge mistake to accept the
first mortgage quote you get.
Many first-time home buyers don’t
know it, but mortgage rates aren’t set in stone. Lenders actually have a lot of
flexibility with the interest rate and fees they offer.
That means a lender you’re looking
at might be able to offer a lower rate than the one it’s
showing you.
In order to get those lower rates, you have to shop around and get a few different quotes. If you get a lower rate quote from one lender, you can use it as a bargaining chip to talk other lenders down.
Shopping around for mortgage rates
also lets you know whether you’re getting a good deal.
For example, a 3.5% rate
and $3,000 in fees might sound all right if it’s the first quote you’ve gotten.
But another lender might be able to offer you 3.0% and
$2,500 in fees.
That makes the first offer a lot
less appealing — but you won’t know it until you look around.
Get at least three mortgaeg quotes
Compare personalized rate quotes from at least three lenders (but more’s fine) to make sure you’re getting the best deal. A mortgage broker could help you compare multiple quotes at once.
And make sure you’re comparing apples-to-apples quotes. Things like discount points can make one offer look artificially more appealing than another if you’re not watching out.
Different down payment amounts, loan terms, loan amounts, and
mortgage loan types will skew loan estimates, too.
For example, an FHA loan would require mortgage insurance
which will increase borrowing costs. A conventional loan with a 20% down
payment lets you skip the mortgage insurance.
Make sure all your mortgage quotes include the same loan type
and terms so you know you’re comparing rates on even footing.
3. Get pre-approved before you make an offer on a home
Many first-time home buyers make the mistake of applying for a
mortgage too late, and not getting pre-approved before they begin house hunting.
How late is too late to start the pre-approval process? If you’re already seriously looking at homes, you’ve waited too long.
You really don’t know what you can
afford until you’ve been officially pre-approved by a mortgage lender. They’ll
look at your full financial portfolio —bank statements, tax returns, pay
stubs, credit reports — and determine your exact home
buying budget.
Even if you think you know what
you can afford, you might be surprised.
Existing debts can reduce your
home buying power by a startling amount. And you can’t be sure how things like
credit will affect your budget until a lender tells you.
By not getting pre-approved for a
mortgage before you start shopping, you run the risk of falling in love with a
house only to find out you can’t afford it.
A
pre-approval letter gives you leverage
Worse, you might find yourself
negotiating for your perfect home and being ignored. Imagine you’re a home
seller (or a seller’s real estate agent) and you get an unsupported offer from
a total stranger.
For all you know, the prospective
buyer stands zero chance of getting the financing they need.
If the seller gets another offer
from someone who has a pre-approval letter on hand, they’re
bound to take that offer more seriously. They might
even accept a lower price from the buyer they know
can proceed.
So getting pre-approved gives you
credibility and leverage in negotiations. And those are two things every
homebuyer needs.
Start your mortgage pre-approval (Feb 11th, 2021)
4. Don’t be late on rent payments
Being late on rent is a bigger
deal than you might think — and not just because it’ll land you with a late fee
from your landlord.
Late rent payments can actually
bar you from getting a mortgage.
Your rent history is the biggest
indicator of whether you’ll make mortgage payments on time. Late or missed rent
checks can prevent you from buying a home.
It makes sense when you think
about it. Rent is a large sum of money you pay each month for housing. So is a
mortgage loan. If you
have a spotty history with rent checks, why should a lender believe you’ll make
your mortgage payments on time?
When you apply for a mortgage, the
lender will check your rent history over the past year or two.
If you’ve been late on payments,
or worse, missed them, there’s a chance you’ll be written off as a risky
investment. After all, foreclosure is an expensive hassle for lenders as well as
for homeowners.
Rent is especially important for
people without an extensive credit history.
If you haven’t been responsible
for things like credit cards, loans, or
car payments, rent will be the biggest indicator of your creditworthiness.
5. Don’t take on any new debts
You may have heard that you
shouldn’t finance an expensive item while applying for a mortgage.
But most people don’t know it’s a
mistake to buy something with big payments even years before applying for a new
loan.
That’s because mortgage underwriters look at your “debt-to-income ratio” (DTI ) — meaning the amount you pay in monthly debts compared to your total income.
The more you owe each month for
items like car payments and loans, the less you have left over each month for
mortgage payments. This can seriously limit the size of the mortgage you’re
able to qualify for.
For example, take a scenario with
two different buyers — they earn equal income, but one has a large car payment
and the other doesn’t.
Buyer 1 | Buyer 2 | |
Income | $75,000 | $75,000 |
Existing debt | $100/month | $100/month |
Car payment | $500/month | $0 |
Qualified mortgage amount | $300,000 | $390,000 |
In this scenario, both buyers
qualify for a 36% debt-to-income ratio. But for Buyer 1, much of that monthly
allowance is taken up by a $500 monthly car payment.
As a result, Buyer 1 has less
wiggle room for a mortgage payment and ends up qualifying for a home loan worth
almost $100,000 less.
That’s a big deal:
$100,000 can be the difference between buying a house you really want
(something nice, updated, in a great location) and having to settle for a
just-okay house — maybe one that needs some work or isn’t in the location you
wanted.
So if home buying is in your
future, examine your priorities. Consider a car with inexpensive payments or
one you can pay off quickly.
And try to avoid making other
big-ticket purchases that could compromise your home buying power.
Keep credit card balances low, too
If you’ve already taken out a big loan, there’s not a lot you
can do about it now. But you can still look out for
shorter-term credit purchases. Try to avoid financing or refinancing
anything before closing, if you can.
Of course, it’s tempting. You’re
going to need a ton of stuff for your new home — and you might want to start
stocking up on furniture, decorations, etc.
But loan officers nowadays
routinely pull your credit score in the days leading up to closing. And any new
account you open or any significant purchase you make on your plastic could
drag that score down enough to re-open your mortgage offer.
It may only be enough to increase
your mortgage rate a little. But in extreme circumstances, it could see your
whole approval pulled and your journey to homeownership stalled.
So avoid making those purchases until after you close. If it helps, imagine the shopping spree you can go on the moment you become a homeowner.
Find a low
mortgage rate and save
If you plan to buy a house any
time soon, now is the time to start thinking about the
mortgage application process.
Take a look at your credit, get
your debts in check, and start shopping around for rates.
Try to see your financial life the way a lender’s underwriter
sees it before starting your loan application.
Remember, the most important thing you can do before house hunting is to get pre-approved and determine your budget at today’s rates.
Verify your new rate (Feb 11th, 2021)
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Source: themortgagereports.com