Applying for a mortgage can be a scary and lengthy process if you don’t know what and what not to do when it comes to the logistics or ‘rules’.
There are literally hundreds of things to think about, especially if you’re shopping for a home at the same time. Your Realtor(R) is a great source of information and education pertaining to the do’s and don’t’s of applying for a mortgage. But, when you’re loan shopping, numbers and terms and conditions can be a tangled mess of language that you don’t understand.
You need to read through all of the jargon AND all the research you can get your hands on to better understand your position in the financial world.
Here’s a breakdown of things you should and should not be doing while your credit is being monitored by the banks that are making the final decision on your loan.
Pay Your Bills on Time
The first and probably most important thing you can do for yourself before even thinking about applying for a mortgage is to make sure that you pay your bills on time.
Lenders will allow late payments in a 12 or 24 month period, but they don’t allow many without asking for additional information. You can provide an explanation if something was out of your control, but overall you should never be late with a payment that reflects on your credit.
Credit cards and auto accounts should be a top priority as these are the creditors that lenders will review first. Utility accounts and cell phone bills have a little more flexibility because they only report to your credit if you’re turned over to collections.
Shop for Lenders
Do your homework when it comes to finding a lender for your home loan.
The Consumer Finance Protection Bureau reports that over 75 percent of homeowners only apply to one lender and a whopping 47 percent don’t even compare lenders!
Different banks and lenders offer different financing options and rate tiers based on different reports on your credit, down payment availability, and term of the loan. If you don’t shop lenders, you could end up getting stuck with an interest rate or term that you could have avoided.
Mortgage brokers offer a great solution when applying for a mortgage because they can shop lenders for you. Choosing a mortgage lender can save you time and money as they search for the best loans. They can also provide tips and feedback relating your credit report and other important processes involved in purchasing a home.
One of the first things lenders look at when reviewing your credit report is your debt to income ratio. Your determined interest rate will be based on this number.
A high debt to income will result in higher interest rates and perhaps even shorter terms. Low debt is calculated at 30 percent of your credit limit or less.
You should be paying off debt long before applying for a mortgage but it also helps while you’re in the process because it shows the banks that you’re capable. You can also raise your credit score while paying off debt which will result in lower interest rates available.
Pay off debt with high-interest rates first to make the most significant impact on your monthly budget.
Don’t Use Your Credit
Don’t have your credit pulled and keep your balances at a maximum of 30% of their limits.
Using your credit while applying for a mortgage will only hurt your score in the eyes of the lenders. If they see activity on your credit report, they will assume you are going to spend above the thirty percent threshold. Not to mention your score will fluctuate so the lender cannot make a decision on your proposed interest rate.
Pay cash, if you can for large purchases and don’t open any new accounts. Don’t necessarily close accounts though, because this could reflect negatively on your credit report. Essentially, you want to leave your credit the way the lenders found it when you first began applying for a mortgage.
Don’t Change Jobs
Lenders look at tenure when reviewing your application. This includes length of employment, rental or previous mortgage payment history, and how long it’s been since you established credit.
Changing jobs while applying for a mortgage could cost you a loan altogether. Lenders want to know that your a trusted and reputable consumer. Tenure on the job also accounts for the weight in the decision process that determines calculations on your loan.
Lenders want to know that you’re a trusted and reputable consumer. Tenure on the job also accounts for the weight in the decision process that determines calculations on your loan. Lenders will assign terms and interest rates based on the length of time you have been and intend to be at one job.
Don’t Forget About Closing Costs
There are so many things going on while applying for a mortgage that it can be easy to forget about the closing costs.
Closing costs will be assessed to your loan when the lender signifies that you are approved. These costs range and are for a variety of services pertaining to your loan including appraisals, inspections and lender fees.
You may need to bring funds to the table at closing or in some cases, some closing costs can be incorporated into the life of the loan. While this is rare, you can ask your lender about these options.
Applying for a Mortgage
The easiest way to shop for home loans is with a licensed mortgage broker. They can search lenders and loan options for you to find the best interest rate.
A mortgage broker can be the saving grace to your home purchase or refinance, saving you time and money throughout the entire process up until and even at closing.
When you’re ready to apply for a home loan or refinancing option, contact us for superior support and professional experience.