Whether you’re a first-time homebuyer or a repeat buyer, you may have questions about the mortgage process. The good news is that your loan officer can answer your concerns and point you in the right direction. But even when mortgage advisors are informative, your limited experience can result in costly mistakes.
The more you understand about mortgages, the easier it’ll be to get through the lending process without surprises or disappointments.
Some borrowers don’t think about their credit until after they’re denied financing for a mortgage. A rejected application can be devastating, especially if you’ve already found the perfect home. Understand, however, that your credit plays an important role in the qualifying process. To get a mortgage, you need a minimum credit score of 620 for a conventional loan, and a minimum score between 500 and 580 for an FHA home loan.
Before meeting with a lender, pull your credit score and credit report from AnnualCreditReport.com (or order your report directly from the credit bureaus). Look at each item on your report and make a note of inaccurate information.
You can’t remove legitimate negative items from your report, but you can dispute errors and unfamiliar activities. If you have a low credit score, make a concerted effort to pay off debt and pay your bills on time. Payment history and amount owed makeup 35% and 30% of your credit score, respectively.
Borrowers are allowed to spend between 28% and 31% of their gross monthly income on a monthly mortgage payment (and 36% to 43% of their gross monthly income on total monthly debt payments). Mortgage payments include principal, interest, property taxes, homeowner’s insurance, mortgage insurance, and sometimes, association fees.
After a lender reviews your application, income, and credit score, the bank then determines the maximum you can afford to spend on a property. Some homebuyers become overly excited after receiving their pre-approval amount and they begin searching for properties at the top of their budget. However, spending the maximum you can afford on a property is risky because the bank might approve you for more than you can “realistically” afford.
Keep in mind that your credit report doesn’t list all of your monthly financial obligations. It includes payments you’re making on loans and credit cards. But it doesn’t include the amounts you pay for other expenses, such as car insurance, life insurance, health insurance, groceries, utilities, etc. Therefore, if any of your regular monthly expenses are high, you’ll benefit from a cheaper home loan payment.
Shopping for properties under budget reduces the likelihood of being house poor, and it allows wiggle room to financially prepare for routine home repairs and maintenance. If you spend all your money on a house payment and bills, you may lack resources to build an emergency fund for unexpected expenses.
Lenders issue pre-approvals after reviewing a borrower’s application, credit report, and supporting documentation like bank statements, tax returns and paycheck stubs. But a pre-approval doesn’t guarantee a loan. If you make poor decisions between the time of getting pre-approved and closing, you can potentially mess up your loan.
It takes about 30 to 45 days to close on a mortgage loan. During this time, your financial and employment situation shouldn’t change. If you quit your job, become self-employed, or acquire additional debt, your lender may determine that you no longer qualify for financing and cancel the loan.
To avoid a closing nightmare, don’t make any drastic changes to your income, employment or credit until after closing. The bank will re-check your credit history and re-verify your employment and salary with your employer one or two days before closing.
Your mortgage pre-approval also includes information on the interest rate you’ll pay, but this rate is only an estimate. Since mortgage rates can fluctuate on a daily basis, the rate you’re quoted today might differ from the rate you receive once you’re ready to close on the home loan. To protect yourself from rising rates, don’t forget to ask your lender about locking your rate once you have a signed purchase agreement.
A rate lock—which is typically good for up to 30, 45 or 60 days—is when a lender promises to give you a mortgage at a certain interest rate regardless of whether market rates increase before your scheduled closing.
Be aware that some mortgage lenders charge a locking fee—either a flat fee or a percentage of the loan balance. Depending on your lender, you may have the option of a rate lock with a float-down option. In this case, if mortgage rates decrease during your lock period, you can take advantage of the lower rate.
In the early to mid-2000s, mortgage lenders allowed home loans with zero down. Unless you qualify for a VA or a USDA home loan, this is rarely the case today. Many lenders require a minimum down payment between 3.5% and 5%. In addition to a down payment, you’re also responsible for closing costs, which can be as high as 5% of the purchase price. So if you’re thinking about purchasing a home, don’t underestimate how much you’ll need to complete a purchase.
