The Mortgage Process: How to Get Ready
1. Clean your credit history.
Lenders want borrowers who have no negative items on their credit report: no defaults, no late payments, no bankruptcies. You might think you have great credit, but nearly 25% of credit reports have errors in them. It is important that you find it first, before the lender does, by getting a copy of your report from a major credit bureau such as Experian, Trans Union or Equifax.
http://www.experian.com/lp/credit-report-r.html (need to add phone numbers for all three)
http://www.equifax.com/home/en_us
(Note: these links will open a new browser window.)
Look for mistakes, such as accounts that are not yours. Contact the creditor by phone or mail and ask them to correct the report. You should then get another copy of the report 30 to 60 days later to ensure corrections have been made.
2. Trim credit card accounts and balances.
Lenders look at how much debt you have and what your potential is for future debt. Aim for few cards with low balances. That’s especially true if you have other debts such as a car loan. Do not pay down or pay off balances with cash intended for a down payment.
3. Close all dormant credit card accounts.
Contact card issuers and ask for instructions on closing the accounts. You may be asked to cut up your card and return it by mail. In any event, you should instruct the card issuer in writing to enter into your credit report “Closed at request of cardholder.” That way, the mortgage lender will have no reason to suspect that a credit problem caused the account to be closed.
Borrowers should NEVER increase their debt during processing (buying new furniture, fixtures, autos, etc.)
4. Solidify your savings.
Lenders will ask for back copies of your bank accounts to see that you have enough cash for down payment.
5. Get pre-approved.
In the pre-approval process, the lender will review your credit, determine whether you have adequate cash for downpayment and closing expenses, and will verify the amount of income you generate each month. Buyers with a mortgage pre-approval have a distinct advantage when they are ready to deal. An approved mortgage establishes a shopper’s buying power by speeding the process and strengthening their bidding position.. The importance of getting pre-approved cannot be stressed enough. Pre-approval is especially important in a booming real estate market, where there can often be multiple offers on one property. If the seller knows that you’ve been pre-approved, they know that you will be able to come up with the cash to close. Getting pre-approval on a loan can take from 2 days to a week. Pre-approval will also speed up the entire mortgage procedure once you’ve found the house you want.. Once you are pre-approved, you can start house shopping in the price range right for you.
6. Downpayment Strategies.
If you are like most people, your home will be the single largest investment you will ever make. Along with financing, you will need a down payment. Although some alternate means of financing require only three percent down payment, five percent is the minimum downpayment for most loans. The bigger your initial down payment, the smaller your loan, which reduces the amount of your monthly payments. How much you put down depends on the cash you have and the amount you will need for closing costs, prepaid property taxes and homeowners insurance.
If you put less than 20 percent down, you’ll likely be asked to protect the lender by carrying private mortgage insurance (PMI). Carrying PMI ensures the investor that the debt will be repaid if you default on the loan. This adds approximately an extra half a percent onto the loan. FHA mortgages, in return for their low downpayment requirements, also charge for mortgage insurance premiums (MIP).
7. Coming up with the Cash.
Typically people will look to liquidate asset accounts in order to come up with a downpayment. These are good discussion points for your financial advisor. Here are a few examples of downpayment and closing cost sources:
- Bank Accounts Whether checking or savings, your bank accounts don’t earn much interest and they are easy to cash out.
- Investment Accounts Stocks, bonds, and mutual funds accounts are easy to liquidate, but you may want to hold onto any accounts you feel will appreciate in value at a rate higher than your mortgage.
- Retirement Accounts When you are buying a new home, your retirement account may allow you to borrow against it. However, you’ll have more debt, thus decreasing the amount you can borrow for a home. There is also a retirement account option, the Roth IRA, which allows no penalty withdrawals.
- Real Estate If you already own a home as a primary residence, you’ll probably sell it when purchasing a new home. This is the most obvious source of downpayment funds.
One word of caution: One big mortgage benefit is the ability for most homeowners to deduct mortgage interest on their taxes. Because of this, a mortgage is considered by many to be a “cheap” source of money, especially if your interest rate is low. You can take money you would have otherwise spent on a downpayment to do other things. Therefore, it may not be wise to put down the largest downpayment you can afford. Instead consider putting down 20 percent and use your excess cash for other purposes. A mortgage is usually the cheapest loan you will ever have.
Think you are ready to get started? Apply today and get ready to purchase the home of your dreams.