As you shop for a mortgage, it’s easy to get overwhelmed. There are so many terms and numbers thrown around, not to mention the decisions you must make. Before you set out to get a mortgage, learn the top things you should know to make it a success.
Know Your Credit Score and Credit History
Before you shop for a mortgage, you should be an educated borrower. That includes being educated about yourself. Do you know your credit score? Do you know what your credit history looks like? If not, now is the time to look.
You can get a free copy of your credit report from www.annualcreditreport.com. This will give you your credit history, not your score. Go over the report. Look for any inaccuracies. Do all of the accounts belong to you? Is all of the payment information correct? If anything is incorrect, address it with the reporting credit bureau and reporting creditor right away. It may take some time to get it fixed.
Also, look at your trade lines. Do you have late payments? Take the time to bring the accounts current. Do you have too much credit outstanding? Try to pay your balances down. The more you improve your credit history, the higher your credit score will get. If you want to know your actual credit score, check with your credit card companies or bank, they usually offer free access to your credit score.
All buyers, whether first-time buyers or not, should get pre-approved before shopping for a home. The pre-approval lets you know a few things:
- How much loan you can borrow
- The maximum purchase price you can afford
- The loan program you qualify for
- The loan’s terms
A pre-approval also helps when dealing with sellers. Many sellers won’t show you their home unless you are pre-approved. It’s the only way to know that you are a serious buyer. Without the pre-approval, you could be a nosy neighbor or someone that thinks they can buy a home, but may not be able to afford it.
We suggest getting quotes from at least three lenders when you get pre-approved. This way you have at least three loans to compare to one another and decide which one is right for you.
Know All of Your Options
Today you have many options when taking out a mortgage. Government-backed loans, such as FHA, VA, and USDA loans are all flexible options. You also have conventional loans, which have slightly stricter guidelines as well as subprime loans, which vary by lender.
Ask about all loans that you qualify for based on your credit score, down payment, and debt-to-income ratio. This way you can weigh all of your options. Government-backed loans typically have flexible guidelines and require little down payments (some don’t even require a down payment). You may pay a funding fee or annual mortgage insurance for the life of the loan, though.
If you have great credit, low debt ratios, and at least five percent to put down on the home, you may qualify for conventional financing. These loans don’t have a funding fee and only require Private Mortgage Insurance until you owe less than 80% of the home’s value.
Knowing your options gives you a chance to determine which loan costs the least now, as well as over the life of the loan. Don’t just take the loan with the lowest interest rate – look at the big picture to decide which loan is right.
Don’t Take Out New Credit
The last thing you should do is apply for new accounts when you are ready to shop for a mortgage. Lenders look at your credit history, your current outstanding credit, and any current inquiries. They’ll know if you took out new credit. Even if you have a lot of inquiries, but no new credit, they’ll be hesitant to give you a loan.
A flurry of new inquiries means that you are desperate for money. If the inquiries are less than 60 days old, there could be new loans out there that aren’t reporting on the credit report yet. It’s best to keep your credit as stable as possible before taking out a mortgage. This is even true after you get pre-approved. Lenders will pull your credit again just before the closing. Avoid opening any new accounts, closing old accounts, or even using your current credit card accounts to keep your approval.
Think About the Future
Most people take the first loan that comes to mind – usually the 30-year fixed loan. What if you could afford more, though? What if you could pay your loan off in half the time? A 15-year fixed loan means you pay a lot less interest because you pay the loan off much faster.
Think about your goals. Do you plan to be debt-free before you retire? Plan your term around that time. Do you plan to go from one income to two or two to one in the future? This could also affect the size of the mortgage payment that you take. While you can refinance your mortgage in the future, it’s best to choose the mortgage now that will still work in the long run.
Shopping for a mortgage doesn’t have to be stressful. Set yourself up with the right mortgage the first time by educating yourself on the process. Go into the mortgage process knowing what you want and the best way to get it. This will give you the best outcome for one of the largest investments of your life.