A home purchase is likely to be THE most expensive item you will ever buy. Shopping for the best mortgage is key to a comfortable mortgage payment and a home you will enjoy. It takes some preparation BEFORE you go shopping.
Know your Credit Score
Why are scores important? Since credit scores influence your interest rate, the higher your score the better the interest rates available to you. For example:
A $250,000 mortgage with an interest rate of 5.0% = monthly payment of $1342.05. (Principal and Interest only, 30 year fixed)
That same mortgage with an interest rate of 4.00% = monthly payment of $1193.54.
See a difference?
Know your Credit Depth
But of course, it’s not THAT simple. It takes more than a good score. The details of that credit are also important. For the best credit score, no more than 2 major credit cards with balances less than 30% of the credit limit – at all times. One other payment, like car payment, will help. It shows ability to pay different types of debts on a monthly basis. And of course, never, ever be 30 days late with any payment. To make sure you aren’t blindsided by items on your credit report, you can monitor your credit using various services. Derogatory credit will have to be addressed. You cannot ignore it and assume it will go away if you plan on getting a mortgage anytime soon.
At the time you begin the process, two most recent years of income must be verified by W-2s and/or Federal Tax returns. All borrowers on the mortgage must provide copies of income.
Lenders will compare monthly debt to your monthly income to see what’s available for housing. They will never put you in a mortgage that you can’t afford no matter how badly you want it or promise to pay. PERIOD.
Change your Direction
There are only two ways to influence Debt-to-income:
- Increase income
- Lower debt
Increasing income is not easy. Lowering your debt will be the best way to increase buying power. There is no magic in this, and, no exceptions.
Add a Co-borrower on the Loan
Adding a co-borrower will help. Their credit and income must meet guidelines as well.
Savings, retirement accounts – Lenders look more favorably on borrowers who have conservative use of credit, good debt-to-income ratios AND savings and/or retirement funds showing ability to save for emergencies.
2 years residential history required. Rent, mortgage, etc. (This can sometimes be eliminated – depending on, you guessed it – CREDIT!)
On your own:
1.____Access your credit report
2.____Address any derogatory credit
Provide to Lender:
1.____2 most recent pay stubs
2.____2 years’ W-2s – all jobs – all borrowers
3.____2 most recent years’ Federal Tax Returns – All pages – All borrowers
4.____2 most recent months’ bank statements – all pages
- ____Copy of most recent 401K, retirement accounts, etc. if applicable
6.____2 years residential history
Mortgage Pre-Approval and House Hunting
The above list will allow your lender to be able to provide you with a “Preapproval Letter”. With that in hand, you can go house-hunting confident that the most expensive item on your “Lifetime Wish-list” is just around the corner.