The path to preparation for a mortgage
The path to preparation for a mortgage really can be easy! Picking a house is a big decision. You have to assess your priorities, future needs, and what sacrifices you’re willing to make. And it doesn’t even stop there… you have to somehow pay for it.
Nearly everyone who buys a home will get a mortgage. Mortgages, like the homes they purchase, come in many different sizes, configurations, and plans. The array of options can be dizzying, but the overall process is usually the same! Here’s a starter guide that should hopefully point you in the right direction.
Before the Application
Before you even apply for a mortgage, you need to make sure you’re prepared. The first and most important step is to know your credit score. Many banks and credit cards provide complementary monthly readings of your FICO score, the primary score lenders use. CreditKarma is completely free and provides your Equifax and Transunion credit reports.
When reading the reports, pay particular attention to your credit card utilization (how much of your credit limit you use) and your derogatory marks (payments sent to collections). If these numbers are high, work on paying off those debts.
You’ll also need a down payment. The old adage of 20% of the home’s price is a great goal, but unrealistic for many people. You should at least have the 3.5% necessary for a FHA loan, a federal program designed for first-time homebuyers.
The Application Itself
It’s smart to shop around! You should get rates from a variety of lenders, from big banks to your local credit union. You will get offered a variety of rates and payment schedules, but there are two primary types: fixed-rate and adjustable rate. The core difference is that fixed-rates are simpler and require the same monthly payment forever, but can cost more long-term. Meanwhile, ARM payments fluctuate with market interest rates, but can often save you money.
The actual application process varies from lender to lender. Some will require prequalification before you complete a full application, a step that better establishes your lending limit. Regardless of who you choose, be prepared to provide:
- Several months of bank statements
- A copy of your W-2 and tax return
- Pay stubs
- A list of assets
- Profit/loss statements, if you own a business
While these documents are a good starting point, bank procedures may mean that your lender requests additional information.
How You’re Considered
While there are many factors that go into your mortgage approval, the biggest is your debt-to-income ratio. This reflects your income versus the bills you have to pay: credit cards, student loans, car loans, and everything else. Your ratio should be as low as possible, but most lenders look for around 43%.
Finding the right mortgage can be stressful, but finding a home shouldn’t. Looking to buy a home in Oakland County, Michigan? We can help point you in the right direction.