You’re ready to make the most important investment of your life: buying a home. You did all the research and ensured that you find the right house that best suits your needs. But are you really ready, when you dig into all of the details of your life? We’ve come up with a checklist that should help you educate yourself and determine the best way to secure a home mortgage loan, which is the first step in securing a home.
What’s your credit score?
It’s a vital number to know to get approved (or not) for a home mortgage loan. Your credit score reflects credit history, bill payments, late payments and possible identity theft. The higher the score, the better chance of getting approved, so checking your score will give you a chance to clean it up. (It’s usually recommended to take about 12 months.) Many lenders require a minimum of a 680 credit score (FHA accepts as low as 580); sign up for Credit Karma and receive your score in minutes.
You’ll increase your chances of getting approved for a mortgage if you have money saved for a down payment. Lenders once approved zero-down mortgage loans, but, nowadays, they’re more cautious. Loans require anywhere from 5% to 20% down, but some government loans can accept less than that. And your down payment isn’t the only thing you’ll need cash for: there’s also closing costs, home inspections, home appraisals, insurance, attorney and application fees, and more (adds up to 5% of the mortgage balance).
For instance, don’t quit your job right before you’re closing on your mortgage loan and don’t take on new debt, i.e., buy a new car. Your mortgage loan is based on the information you put down in your application, so any changes to employment and your income/debt status can either delay or reject the process. Lenders will evaluate your debt-to-income ratio before deciding on how much the loan amount can be and recheck your credit before closing.
Getting multiple quotes from different lenders will help you negotiate a better deal. Try to get three or four loan offers. Because they all have different rates and closing costs. Conventional loans are the cheapest for someone who has a 20% down payment and good credit, but there are also VA loans for qualifying veterans, first-time home buyer loans and more.
What can you afford?
This is such an important question to know the answer to for a home that will comfortably fit your budget. Lenders may pre-approve an amount that’s more than you can afford, so knowing your comfort zone, or debt to income (DTI), will keep you ahead of the game and within your means. You’ll want to keep your DTI ratio of no higher than 36%.
Be paperwork prepared.
When you have these documents more readily available, it will save you a lot of time during the mortgage approval process, which is one that requires so much paperwork, including W2s from current and past employers, paycheck stubs, bank statements, last two years of tax returns, gift letter if you’re using gift funds, list of your debts, list of your debts and assets, proof of timely rental payments, credit report, profit and loss statements, proof of additional income, bankruptcy paperwork, divorce decree and more.