The average house stays on the market for just 50 days. The shelf life of many homes is getting shorter than that each month in the United States. That means buyers need to be ready to make an offer as soon as they find a house they love.
The key to making a successful and qualified offer lies in finding the right mortgage for your new home. However, if you’re applying for your first home loan, you might not know where to start.
There’s more to the process than finding a lender and making a down payment. You need to take your time and make sure you have everything in order.
Here are a few key tips to keep in mind that will make getting a great mortgage so you can get into the house of your dreams as easily as possible.
1. Look at Your Credit Score First
Before you start looking at mortgage options and searching for lenders, you need to know where you stand financially. Remember, every lender will look at your credit score when deciding whether they want to issue you a loan.
Your credit score gives lenders an idea of whether you’ll be a responsible borrower and repay the loan in full or are at-risk of defaulting on your mortgage loan.
The higher your score is, the more confident lenders will be in working with you. If your score is lower, they’ll see you as a risky borrower and may not be willing to give you great loan terms. You may end up qualifying for a smaller loan or have to pay a higher interest rate on what you borrow.
Check your credit score and find out where you stand for potential future property loans.
If your score is low (650 or lower), do what you can to build it up before you apply for a loan. If your score is over 650, try to keep it that way until you’re in your new home.
How to Build Your Credit Score
If you decide that you need to work on your credit before you apply, don’t panic. Building your score up is possible.
Start by paying down your outstanding debt as much as you can. Pay your bills on time every month and avoid taking out any new loans.
Over time, your score will increase and you’ll be in a better position to apply for a mortgage.
2. Gather Your Financial Documents Ahead of Time
No matter what type of mortgage you’re applying for, you’ll need to give your lender detailed information about your finances. As a general rule, lenders will request your tax returns for the last two years, current bank statements, your Social Security number, current pay stubs, and copies of your driver’s license.
The sooner you can get those documents together, the easier it will be to complete your loan application. Start a file and keep all of your information together. This way, you’ll find it easier to access the documents you need as you need them. Keep in mind that different lenders may require additional documentation. They’ll make those requirements clear when you apply and can walk you through where to find the information you need.
3. Figure Out Your Down Payment
When you’re applying for a mortgage loan, conventional wisdom suggests that you should have at least 20 percent of the purchase price of the house saved up as a down payment. This down payment helps show lenders that you’re serious about buying a house.
Before you start looking at current mortgage rates and speaking with lenders, look at your savings. If you have the full 20 percent or more saved up, you’ll be in good shape.
If you don’t have 20 percent saved, you’ll want to look into down payment assistance programs or be ready to pay for private mortgage insurance once you accept the loan. The insurance protects the lender should you end up defaulting on the loan early on.
That said, if you have more than 20 percent of the purchase price saved up, you’re free to use a larger down payment. This will decrease the amount you have to borrow and can save you money in the long run.
The less you borrow, the less you’ll pay in interest costs over the life of the loan.
4. Always Shop Around
Though it’s tempting to work with the first lender that you find, it’s not always in your best interest. You need to shop around to make sure you’re getting the best deal on the loan.
Different lenders will look at your finances in different ways. Some lenders will view your financial situation more positively and be willing to give you a larger loan. Others will see you as high-risk and won’t be willing to lend you money at all.
The only way to know where you stand with different lenders is to get quotes from several companies.
Compare those quotes in detail. Look at the amount they’re willing to give you, the interest rate they’ll charge, and any fees associated with the loan. These will likely be different from lender to lender.
Choose the lender that offers you the lowest interest rate and the highest principal amount. This way, you’ll be able to get into a great home that’s well within your budget without worrying about your loan being too small.
5. Look at Homes After Getting Pre-Approved
According to the loan officers, it’s always best to get pre-approved for a mortgage before you start shopping. Remember, just because you can afford a certain mortgage payment each month doesn’t mean you’ll qualify for a mortgage of that size.
You’re only able to buy homes that you can pay for with your combined down payment and loan amount. If lenders approve you for a loan with a small principal amount, you’ll need to restrict your home search to properties in that price range.
By getting pre-approved for a loan, you’ll have a better idea of the types of homes you can afford. This makes it easier for your real estate agent to help you find the right properties and spares you the frustration of falling in love with a property you can’t realistically afford.
6. Consider Getting a Rate Lock
Interest rates change frequently. This means the rate you receive in your initial mortgage quote can change by the time you close on the property.
If rates drop, this is good news. You’ll end up getting a lower interest rate than you initially thought. Over the life of your loan, a lower interest rate can save you thousands of dollars.
However, if rates go up, you’ll end up paying more over the life of the loan. Worse, you’ll end up increasing your estimated monthly payments, putting strain on your budget.
When you agree to the loan and are ready to move forward with the home purchase, you’re able to lock your interest rate for a set period of time. This means it won’t change even if market rates increase. Keep in mind that you’ll need to request the rate lock from your lender.
They won’t do it automatically and the rate lock will expire if you fail to close on a property by the target date.
7. Don’t Apply for Other Loans Until You Close on the House
Your mortgage loan is in limbo until you close on your new home. This means lenders want to see your financial situation stay the same until you sign on the dotted line.
Whenever possible, avoid taking out new loans or lines of credit until you’re in your new home. This way, your financial situation will look stable to lenders and they’ll feel confident moving forward with your mortgage.
If you end up taking out a loan or opening a new credit card, your overall debt will increase and your credit score may drop. Once this happens, lenders may not want to give you the full amount you initially qualified for. They can change what they’re willing to lend you or dismiss your application altogether.
If for any reason, you need to take out a loan, it’s a good idea to reach out to your mortgage broker or loan officer as soon as you can. The sooner you do, the easier it will be for them to process your application and increase your chances of getting approved for the mortgage.
Getting a Great Mortgage Is Possible
Before you can move into your dream home, you need to find a great mortgage. Keep these tips in mind and you’ll be able to get a great property loan at an interest rate you can afford.
Just remember to start applying for home loans early. The sooner you start the mortgage process, the easier it will be to make a qualified offer on your ideal house.
Once you close on the property, you’ll need to find ways to make your new house feel like home. For more tips and tricks to help you transform the space without breaking the bank, check out our latest posts. In the Real Estate section of the Bootstrap Business Blog we offer a wide variety of free resources and advice on mortgages, property investment, and home improvement.
