Probably the most common question in real estate involves how to get your first mortgage. If this process seems a little scary, if you don’t like people asking financial questions, if you worry that you might be rejected, then in the next few minutes you’ll likely relax. Here – in plain language – are the ten basic strategies needed for a successful mortgage application.
Credit is important. Check your credit standing several months before searching for homes or financing. Until the end of December 2023, you can get credit reports from Equifax, Experian, and TransUnion weekly and without cost at AnnualCreditReport.com. If you see factual errors or outdated information contact the credit reporting company immediately.
Higher credit scores mean lower rates. Credit scores are based on the data found in credit reports. The higher your credit score the less risk for lenders. Getting rid of incorrect or outdated information can boost your score. And what is a typical credit score? According to the Black Knight Originations Market Monitor, in April 2023 the average home buyer credit score was 733. If this number seems high, remember it’s an average credit score, meaning many borrowers got financing with lower numbers.
Protect your interests. The Consumer Financial Protection Bureau (CFPB) has reported that “failing to comparison shop for a mortgage costs the average homebuyer approximately $300 per year and many thousands of dollars over the life of the loan.” The bottom line: Speak with three or more lenders to cut costs and better understand your financing options.
Ask real estate brokers and lenders if you qualify for down payment assistance. Many programs provide grants, “soft seconds” (forgivable loans), and interest-rate subsidies. Although it may seem unlikely, ask if help is available. For instance, with some programs you may be regarded as a “first-time” homebuyer even if you once owned real estate but have not owned during the past three years. Also, there are often special rules to help those who have been divorced.
Beat the rush, get your paperwork together. Lenders – with your permission – can now get electronic access to bank accounts, credit reports, credit scores, and tax information. However, there is additional paperwork they may want and you can speed the underwriting process by having such information available when you first apply for a mortgage. Good items to have include a photo ID, your last three pay stubs, gift letters, employment information, statements for securities and retirement accounts, W-2s if employed, and landlord contact information. Be sure to keep copies of every document you give lenders.
Get preapproved. With a preapproval, loan officers will review your financial information to see if any corrections are needed before making a formal mortgage application. After the review, lenders can provide a letter showing that you have been preapproved for financing. This is not a promise to lend, rather such letters say you likely can qualify for a certain mortgage amount. Having such a letter in hand can help you negotiate with property owners.
Slight interest rate differences can become big costs over time. A $300,000 loan at 6.25% over 30 years has a monthly cost for principal and interest of $1,847.15. Raise the rate .25% to 6.5% and the monthly cost increases to $1,896.20. That’s a difference of $49.05 per month or $588.60 per year.
Beware of fees. It’s a very easy matter for lenders to offer “low” interest rates. This can be done by quoting a low percentage upfront and then adding an assortment of fees and charges. The interest rate looks attractive, but the actual loan cost can be much more than borrowers might have paid with a somewhat higher rate and fewer fees. If you see a low interest rate and high APR you should look very carefully for fees and charges.
Protect your interests. Lenders who offer to finance must provide a three-page federal loan estimate form that outlines their offer in detail. You can use this standard form to compare offers. Be sure to look at the closing costs and five-year expenses shown on the form.
Put your credit cards away. Once you apply for a mortgage try to limit credit card use and do not buy big-ticket items. The reason? Lenders are likely to check and re-check your credit during the application process. Credit card spending can lower your credit score, change debt-to-income (DTI) ratios, and in some cases cause applications to be denied. Avoid such problems by being frugal until the application process is completed and closing is finished.
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Peter G. Miller, who bought his first home at age 27, is a nationally-syndicated real estate and mortgage columnist. He is the author of numerous articles featured online and off, and has written seven books published originally by Harper & Row (one with a co-author).
Photo by Ian MacDonald on Unsplash
© 2023 Peter G. Miller. All Rights Reserved.