Are you looking at your dream home? The 2008 recession made homeownership a challenge for some. By 2014, 64.5% of the U.S.A. population are proud homeowners. That’s quite a few people putting out a welcome mat and getting to know their neighbors!
If you’ve got your eye on a great house, it’s important to understand exactly what you’ll need to do in order to apply for a mortgage. For the typical application, they will ask for these details:
Your credit score, credit history & any issues you’ve had with your credit history in the past 5 years.
How much money you can provide for a down payment.
Your monthly income. If you are a couple, they will ask you each for your monthly income.
Your monthly expected debts (these could include car payments, credit card payments and student loans)
An amount for the house you can expect to afford.
Step #1: Start by sitting down and determining your monthly income. If you are a couple, both of you need to bring your financial information together, to total it. Look first at the expected money you have each month that is coming in. Next, understand how much money you pay on regular monthly debts. Get your records together which show both your income and your debts. These can include:
Checks for contracting/freelance work
Money you receive monthly from investments
Credit card payments
Step #2: Now order your credit report from the 3 major reporting agencies. You can do this once a year for free. You’ll receive your credit reports from Experian, Equifax and TransUnion. To obtain a mortgage, you will feel most confident you will get a reasonable interest rate and good mortgage if your credit score is close to 700.
Today, most couples understand that it takes a bit of time to prepare to purchase a home, get a mortgage and get everything together. Take heart if you are looking at this information and your credit score is not 700, as there are things you can do to improve it. Start by making sure that you pay all of your bills on time. Work to pay off any debts that you have and request creditors report these to the 3 agencies, this will help your score.
Step #3: Plan to save for a down payment. While most mortgages can help you pay for most of your home costs, typically you are expected to put a cash payment on a home. There may be opportunities to purchase a home without placing any down payment, but this can often depend on the individual situation also with the home seller. It is wise to plan to put something down, as this gives you the most options when looking at homes. Consider viewing homes that are similar to what you hope to buy, and asking what a down payment would be for them.
Step #4: Determine your mortgage budget. While many home buying experts recommend that home buyers keep mortgage costs to about 35% of your monthly budget, in some communities this is difficult. If you are looking in a premium area, such as Honolulu, Hawaii or Dallas, Texas or New York, NY then quite likely your mortgage costs are going to be a much higher percentage of your budget. What is far more important, is that you feel comfortable with the amount your mortgage will be and the percentage that it is in your budget.
Do remember that for most homebuyers, a mortgage is a long term investment. You will be in this home for 10 years, 20 years or even longer. So do consider what other life circumstances might occur during this time and money you might need for other purposes. Would you need more money to help send a child to college? Are you nearing retirement age and will have less income? Keep in mind that there may be the option to refinance your mortgage in the future to save money.
Step #5: Prepare your paperwork and meet with a loan officer to submit your application. For some, preparing the paperwork can feel like a bit of a challenge. Some people are very organized and they save every single credit card statement they’ve ever had. Others never hang on to a receipt or document, they just don’t like the clutter. But your mortgage loan officer is going to want to see all of your documents, in print, right in front of them. What will be even more helpful is if you make several copies of all of your documents. This way if something gets misplaced during the process or you need to apply at another company, you’ve got everything you need with little fuss.
One of the best things about getting all of your documents together to apply for a mortgage is it can make you realize exactly the type of house that you can afford. It’s easy to dream and look at a pretty home and to say, “Oh, I want that one!” But if you don’t realize exactly what falls within your budget, then you may not realize that the much nicer, bigger home next to it is one you could afford too.
Get excited as you prepare to apply for a mortgage. This is an important step on your way to homeownership. Soon you’ll say, “Welcome to our home!”