Spring is here and the housing market is booming! Purchasing a new home is on many people’s minds, maybe even yours. Before you jump feet-first into the home buying process, you may want to first learn about what is involved when applying and qualifying for a mortgage.
If you’re preparing to buy your first home, you can make the process easier by learning as much as you can about the mortgage process before you find your dream home. Knowing what to expect allows you to plan ahead and will help you find the loan program that best meets your financial situation.
Monitor Your Credit Score
A very important factor in applying for a mortgage is your credit score and debt payment history. A low credit score may impact the amount of money you can borrow as well as potentially impact your interest rate. Having a good credit score can be a huge advantage. It may allow you to qualify for a lower interest rate, potentially saving you thousands of dollars over the life of your loan.
If your score is lower than you anticipated, there are some things you can do to improve it. Paying off debt and paying all your bills on time will help the most. Do not open up any new accounts or take on new debt during the mortgage application process. If you have paid down your credit cards, keep the cards open, do not close them.
If you do not know your Credit Score and would like to know before applying for a loan you may check your credit score with the three major credit bureaus (TransUnion, Equifax, and Experian).
For more information on how your credit score plays a role in the mortgage process, read our article here.
Know Your Debt-to-Income Ratio
Your debt-to-income ratio is an important part to determining how much home you can afford. Known in the mortgage industry as a DTI, it reflects the percentage of your monthly income that goes toward monthly debt payments. When applying for a mortgage, your DTI will be evaluated along with your credit, employment history, income and collateral.
To calculate your DTI, take your total monthly obligations (ex: car payments credit card debt, student loans) and divide that number by your gross, income. The maximum DTI ratio is 43% although there are exceptions where this can go higher.
For more on how to manage your debt and improve your DTI, click here to read our blog article.
Save, Save, Save
Once you start thinking about the home-buying process, you’ll want to begin saving for a down payment. Depending upon your loan program you may need as little as 3% for a down payment. A larger down payment may help reduce your interest rate.
Having some extra savings set aside could allow you to place an offer over asking price to better your chances of getting the house you've fallen in love with. If you place an offer above the asking price, and the home doesn’t appraise that high, you'll need to pay the difference in cash out of your pocket.
Additionally if you have 20% or more as a down payment, you won’t be required to pay private mortgage insurance (PMI), which will lower your monthly payment.
For more information on down-payments, read our article here.
Start Gathering the Necessary Paperwork
When you’re ready to start the application process, it’s best to your paperwork already put together. Some of the documents you will be required to provide are: your pay stubs for the past month, your tax returns from the previous two years, and two months’ worth of bank statements. You will also be required to document where your down payment funds are coming from. Whether it is from savings, a retirement account or gift funds from an acceptable source your Loan Officer will let you know what you will need to provide.
Before you go looking at homes, it is important to contact a LMCU Loan Officer and get pre-approved for a mortgage loan. This pre-approval will let you know how much you qualify for so you are looking at the right size and priced homes. It also shows sellers and realtors that you’re serious, qualified, and ready to close on a home, making your offer stronger and potentially more attractive.
Find A Loan Officer
From getting you pre-qualified, to walking you through the entire loan process, a loan officer can help you achieve your financial goals with a loan program that meets your needs. Your loan officer is there to present your options, explain rates and fees as well as walk you through the entire process. Working with a LMCU Loan Officer will give you the confidence that you are making the right decisions for you and family.
Homeownership is a huge investment, and it’s a not one-size-fits-all process. Luckily, our LMCU loan officers can provide the expertise and service needed to make your home buying dream a reality.
*Credit Karma, 2019.