Most homebuyers don’t pay cash when purchasing a home – some of the latest statistics reveal that more than two in three were financed through a conventional mortgage. If you plan to become one of the many who take out a home loan, one of the first things you’ll want to do is use a house payment calculator to determine how much you can afford.
Before shopping for that home, getting pre-approved will ensure you’re looking in the right price range while providing a competitive advantage in a seller’s market as it makes your offer more credible.To help you understand the entire process, here’s what you should know when applying for home financing.
It’s Critical To Do Your Research
With so many different options for mortgage loans available today, it’s critical to do your research and shop around for the best loan and the best lender. To understand what you’re looking at, you’ll want to know the basics of fixed- and adjustable-rate loans, VA loans, and FHA loans.
Go beyond asking lenders, “What’s your rate?” While that’s important, it’s the wrong way to find the right financing for your needs. Ask what the options are for fees, points, and rates, in addition to looking into the lender’s reputation.
Customer satisfaction is important when you’re getting a mortgage that you’ll spend decades making payments on.
Know Your Credit Score
Before applying, be sure you know your credit score. The higher it is, the lower your interest rate will be. Ideally, it should be at least 740 for the lowest rate. If it falls between 620 and 739, you’ll have to pay a higher rate which means your loan payments will be higher.
If it’s lower than 620, you’re unlikely to be approved without making a large down payment. It’s better to know before you apply so you can work on improving your score first.
Avoid Opening New Accounts or Closing Old Ones
If you take on more debt shortly before applying for a home loan, it could impact your ability to secure it. Put off opening any new lines of credit, getting a new credit card or loan. Avoid closing any existing accounts too as it could have a negative impact on your score.
The longer your credit history, especially when you’ve had a good record of making payments, the better. If you close out an old account, even if it has a zero balance, it could shorten your credit history, hurting your score.
You’re going to need lots of documentation so that your lender can verify your overall financial situation, including your creditworthiness and employment history.
Before you complete that application, ensure that you have your W-2s for the past two years, recent pay stubs (that include the most recent 30 days), signed personal and/or business tax returns, and bank statements for all your financial accounts, including investments for the previous two months. If you’re self-employed, you’ll need a copy of your year-to-date profit/loss statement or most recent quarterly statement.
It is possible that your lender will require other documents too, depending on the type of mortgage you’re applying for and your particular circumstances.