Do you believe getting a mortgage is complicated? It’s usually due to a lack of understanding about how the mortgage process works. If you can take some small, sensible steps during the early stages of buying a house, you will ultimately have an easier time getting a mortgage.
Knowing what lenders want and how the system works makes the entire process less intimidating. Pre-launching your mortgage will make the experience of buying your home by way of a mortgage a LOT more manageable. This is a simple concept—get prepared for a successful, fast-tracked, financially rewarding home purchase.
Rate Disparities Exist
Before we delve into credit scores and down payments, let us first clarify something that confuses most people—advertised mortgage rates.
You’ve likely seen mortgage companies promote their unbelievably low interest rates; however, these advertised rate deals usually come at an additional cost(s) or with specific caveats attached to them. For example: One lender might provide you with an interest rate that is lower than those through other lenders, but they will charge you an increased upfront fee. Alternatively, some lenders may offer you an interest rate that is higher than those through other lenders, but they will provide you with lesser closing costs.
Choosing between paying more for a mortgage up front to get a lower monthly payment or paying less initially to have a slightly higher monthly payment is an example of weighing the costs and benefits each option presents; neither option has any intrinsic superiority to the other; it depends on how long you plan to maintain your mortgage and which option is most economical.
The optimal course of action is not necessarily to shop for the lowest possible rate; the optimal course of action is to find the optimum ratio between cost and rate.
Items that are available to you when searching for a mortgage are similar to many other items. There are usually two primary types of sources of mortgages: traditional banks and credit unions and mortgage brokers; mortgage brokers are generally viewed as the intermediary who helps borrowers obtain mortgage financing through multiple lenders to provide borrowers with the most favorable terms available.
Many people have found that using a mortgage broker can save borrowers time and gives direction in the process; however, when borrowing directly from a lender can be somewhat less expensive to the borrower and give the borrower more control; nevertheless, borrowing from a lender directly generally requires more effort than going through a mortgage broker.
The hardest part of buying a house is ahead of you now. And, to be honest, this part is where most people try to focus their energy rather than on shopping for a home!
Before contacting any lenders, accomplish these four objectives:
- Improve your credit rating.
- Reduce your debt.
- Calculate your budget.
- Have a down payment ready.
These steps will help to define your financial status as a borrower. The stronger the financial position you have today, the better your financing opportunities will be tomorrow.
Much like preparing for an interview, you want to present yourself in the best light.
Credit Score – Your Financial Reputation
Your credit score can be thought of as your financial report card. The lender uses this as the first measure of how trustworthy you are with regards to money.
A higher score normally results in:
- Lower interest rates
- More favorable loan terms
- Superior access to borrowing
A minor change in your credit score can translate into huge savings throughout the life cycle of a mortgage. Consequently, if you begin working on improving your credit early on, you will position yourself to have an upper hand over other potential buyers.
Improving your credit isn’t something you can do overnight, but with some effort and consistency it is possible for you to get there.
Debt-to-Income Ratios Are the Most Important Number You Didn’t Know About…
Another huge piece of the puzzle is your Debt to Income Ratios, or DTI for short.
DTI is a simple percentage calculation used to determine how much of your income goes to pay off debt each month. Lenders use this number when determining how much of a loan someone can afford to safely hold at this time.
The lower your DTI is, the less of a risk you pose as a borrower when obtaining funds and therefore, the greater your potential for being approved for a loan as well as your ability to borrow money. Therefore, you need reduce your overall amount of debt before applying for a mortgage in order to significantly increase your chances for receiving your mortgage.
Mortgage Affordability: Don’t Overstretch Yourself When Buying a House!
Buying a house that is more than what you can afford is one of the biggest mistakes people make when buying a home.
A mortgage is more than just a monthly cost; there are many things to consider before deciding whether or not you can afford to purchase a home, including:
- Property Taxes
- Insurance
- Maintenance Costs
- Utilities
- HOA/Condo Fees (if applicable)
When combined, these monthly expenses add up to a large sum of money in total costs over time. If your monthly payment amount exceeds your ability to pay (i.e., you won’t be able to save for retirement or other financial future goals), you may find yourself in an unmanageable financial situation.
As such, smart home buyers focus on what they’re able to be comfortable doing from a financial standpoint versus what they are approved for.
Just because you may be able to obtain financing from a lender doesn’t mean you should purchase a home based solely on the lender’s determination of your ability to afford making payments on a mortgage.
Down Payment: The Bigger the Better
The second important part of your overall plan is saving for a down payment. This doesn’t need to be perfect.
The greater the amt you can put down, the smaller loan amount & monthly payment. And, in many instances, no additional ins. costs. This means waiting several years to save for a larger down payment doesn’t always work out to your benefit.
Sometimes it’s better to purchase earlier with a smaller down payment than it is to wait until home prices have continued to appreciate.
It’s all about being balanced and knowing when to buy.
Pre Approval: The Step That Gives You Assurance
Once you have everything prepared and are ready to go, you will want to get pre-approved for a mortgage.
This is when you submit documents including:
- Pay Stubs
- Bank Statements
- Tax Returns
- Financial Information
Then, the lender will tell you what type of mortgage you can qualify for and estimate the amount of money you will be able to borrow.
Pre-approval is beneficial because it gives you a clear understanding of what your buying power is. It also makes your offer more competitive by demonstrating to the seller that you are serious.
In an active real estate market this is an extremely important advantage.
Do Not Start Viewing Houses
Most people usually go on the Internet and browse houses that are available for sale; however, in most cases, the process of buying a house should be viewed differently.
The method of determining which houses to view is as follows:
- Prepare your finances
- Get pre-approval for a loan
- Understand your budget
- Start viewing houses that are within your financial means
This method will save you time and will eliminate any disappointment because you will be viewing houses that match the finances you have available for the purchase.
Once you have been approved to purchase a house and have made an offer on a house and that offer is accepted, the subsequent process of having a home inspection performed, an appraisal conducted, the completion of any paperwork, and closing will automatically take place once you have successfully negotiated the purchase with the seller of the house you want to purchase.
Be Prepared for an Easier Experience
The process of obtaining a mortgage is not based on luck or is extremely complicated. It is based on being prepared to apply for the mortgage and knowing how the process of obtaining a mortgage works before making an application.
By improving your credit, paying off debt, saving for a down payment, and obtaining a pre-approval for a loan at least a couple of months in advance, you will have a much more enjoyable, smoother, and less stressful process for purchasing a house.
When done correctly, buying a house is going to be very enjoyable in comparison to being stressful.
