Brush Up on Your Mortgage Knowledge

Before you set out to buy that home you have your eye on, be sure you have everything together for the mortgage lender. Here’s a quick review on what you’ll need.

If you’re in the market to buy a new house, congratulations! It’s an exciting, albeit stressful time. Before diving into the process, it may be a good idea to brush up on your mortgage knowledge. Here are some tips to get you started.

1. Take Care of Your Credit

In order to be taken seriously as a buyer, you’ll need to get preapproved for a loan. And the fact of the matter is, you won’t get pre-approved if your credit is in shambles.

Not sure what your credit score is looking like these days? Luckily, you can obtain a free copy of your credit report once per year from each of the three nationwide credit bureaus: Equifax, Experian and TransUnion. Most lenders will want to see your credit score at a 620 or higher, though different lenders may have different requirements. Keep in mind, the better your credit, the lower your down payment requirement and interest rates will be.

According to Experian, your payment history is the most important factor in determining your credit score. Before giving you a loan, lenders will want to know that you’ll be able to pay back your debt. So, a bunch of missed credit card payments doesn’t look good. Your credit usage is also an important factor, since using more than 30 percent of your available credit can negatively impact your credit score. Paying off any debts, keeping up with your monthly payments, and only using about a third of your available credit will help you to obtain and maintain a good credit score.

2. Consider Your Budget

Lenders will want to know how much money you’re planning to put into a down payment, since this will determine what your monthly payments will be. A 20% down payment is usually a good starting point, but the larger your down payment, the more competitive you are as a buyer.

Lenders don’t want you borrowing too much, so consider what you’re able to pay per month relative to your income. Remember, your budget must be able to cover the mortgage principal, mortgage interest, property taxes, homeowners insurance and utilities. If you’re looking at getting a townhouse or condo, you’ll also have to pay for homeowner’s association dues.

3. Know Your Mortgage Options

Your mortgage options can vary based on a few factors. First of all, what is your goal for a loan term, or the amount of time you’ll take to repay your loan? Typically, terms are either 15 years or 30 years, but there are other options available. With shorter-term loans, you’ll likely have much higher monthly payments but lower interest rates and total costs. Longer-term loans tend to have lower monthly payments, but higher interest rates and total costs.

Second, are you hoping for a fixed or adjustable interest rate? Fixed rates are a lower risk since they don’t change over the years. This means your monthly interest payments will stay the same over the course of your loan term. Adjustable interest rates are riskier, however. They’re typically lower at the beginning of your loan term, but the rate can increase or decrease throughout your loan term based on the market.

Finally, what type of loan are you hoping to obtain? Most mortgages are conventional, but you may qualify for a special mortgage program if you’re a first-time homebuyer or in an unusual situation. Check with the Federal Housing Administration, the U.S. Department of Veterans Affairs, and other organizations to see if you might qualify for a special mortgage.

4. Gather Your Papers

There’s a lot of documentation you’ll need to provide before you can get approved for a mortgage. To save yourself a headache, start tracking down all of your documents before reaching out to a lender. They’ll want to see a government-issued ID, your most recent pay stubs, W-2s, bank statements and tax returns. If you already own a home, you’ll also need to provide your most recent mortgage statement and your homeowners insurance policy. Most likely, you’ll be able to upload all of these items directly to the lender (no need to schedule an in-person appointment).

5. Remember What NOT to Do

While you’re in the process of getting a loan approved, there are a few things that you absolutely should not do. For starters, don’t go out and buy a new car, expensive furniture, or any other large purchase. Even if your favorite furniture store is having an amazing 20% off sale, resist the urge to spend those hundreds or even thousands of dollars. These payments will alter your credit score, which could disqualify you from being able to qualify for a mortgage.

Speaking of credit, don’t stop making payments on your credit card bills, student loans, car payments, rent, utilities, or anything else while you’re looking for a home. Also, avoid applying for new credit cards while your mortgage is being approved, as this could lower your credit score and potentially disqualify you from qualifying for a mortgage. Closing lines of credit can also negatively affect your score, so while you’re in the midst of the home-buying process, try your best to keep your credit exactly the same.

In addition, avoid making large deposits and withdrawals from your savings and checking accounts that you cannot document. Your lender will want to know why a random deposit the size of your paycheck just happened to show up into your account. If you can’t explain with documents where the money came from, you could delay your loan closing.

Finally, while shopping for a home, do not quit your job – even if you found a better one. Your lender will want you to produce 30 days’ worth of pay stubs, which could delay your closing. Also, don’t quit your extra part-time job until after you’ve closed.

Off You Go!

Buying a home can certainly be overwhelming at times, but hopefully it’ll be fun and rewarding for you as well. If you have a quality lender on your side, you’ll be just fine when it comes to getting a fair mortgage rate.
We wish you the best in finding your dream home!

Now’s the Time to Refinance

What’s better than purchasing a dream home? How about paying less for it now and in the future?
Interest rates are at all-time lows, so if you’re looking for a way to save some money during these uncertain times, it might be time to consider refinancing your mortgage.

“If the last time you refinanced your home is more than 30 months ago, it would be worthwhile for you to look at a refinance again now,” says Scott Arnold, vice president of lending for Cornerstone Credit Union, in Freeport.

Refinancing essentially means closing your existing mortgage and opening a new one at a potentially cheaper interest rate, thus reducing your monthly payments while saving thousands of dollars over the course of your loan.

Getting approved for a new rate is pretty similar to the process of securing your first mortgage. That’s why Arnold says to be patient during the process and provide any necessary documents to your lender as quickly as possible.

“With all the government regulations, your mortgage loan processing will likely take 45 days from start to finish,” Arnold says. “Also, don’t be surprised if your lender asks you to provide funds for an appraisal up front when doing a refinance.”

Your new interest rate will be determined by several factors, with your credit score being the most important.