It’s critically important to pay your bills on time. There’s no single element that dramatically affects the success of an application as much as your credit history. Another thing, of course, is savings. You should have a disciplined savings pattern, since that’s the kind of behavior that’s going to make you a successful homeowner.
Everybody comes into the real estate market with a different perspective and level of experience. The fact that online mortgage applications, new loan products and rising interest rates compete for attention these days makes it all the more difficult to give foolproof advice. But, some general rules apply to pretty much anybody when it comes to getting the money to buy a home.
Here are some DOs and DON’Ts you should consider when you seek to get an ideal mortgage:
1. Make loan and other debt payments on time, especially over the months leading up to the filing of your mortgage application. It sounds simple, but every 30-, 60- or 90-day delinquency on a loan or credit card will reduce the credit score the lender ends up considering as part of the loan file. That score, in turn, will determine the interest rate you get on your home loan.
2. If something has to be missed, miss the credit card payment first, followed by the payment on any installment loan you might have, and finally, the payment of an existing mortgage. Because credit-scoring systems look at the performance of similar loans first when deciding what type of score to assign, it’s best to follow this order. This will give the most weight to the performance of another mortgage, for example, then the performance of something like an auto loan, which features fixed payments and a fixed rate the way many mortgages do. Payment performance of so-called “revolving” loans, like credit cards, which feature variable payments that fluctuate with the outstanding balance, is typically evaluated last.
3. Consider paying off more debt and putting down a smaller amount at closing. This move will leave you with a larger mortgage, but it allows you to replace non tax-deductible, high-interest rate debt with lower-rate mortgage debt that features deductible interest.
4. Get the mortgage first if multiple financial obligations are going to pop up in the near future. Numerous credit inquiries, such as credit card applications, can hurt your credit score, especially if they’re filed in the months prior to the home loan review process.
5. Increase the size of the down payment you’re able to make by saving as much as possible, as often as possible. Evaluate money market or other accounts that offer reasonable rates of return, automatic payroll deductions, or other financial incentives to save.
While these are all great steps to follow, you also have to consider what you shouldn’t do as well. Resisting the temptation to overspend is at the top of the list.
1. Don’t make any big purchases over the next couple of months. Besides the obvious fact that it makes less money available for the down payment, it might require you to get yet another loan. A significant debt such as a $15,000 auto loan will look bad to the mortgage lender as they review your credit-worthiness. Plus, this adds to your monthly expenses and may affect your ability to qualify for the mortgage loan you want.
2. Don’t try shooting for that six-bedroom house in the Hamptons if it’s going to be too much of a stretch in your current budget. Lenders consider what’s known in the industry as “payment shock” when approving loans. Someone who goes from a relatively small monthly housing payment to a large one either won’t qualify for a mortgage or will end up having to cover too much loan with too little money.
3. Don’t just get pre-qualified for a mortgage; get pre-approved. To get pre-qualified, you only need to submit credit and income/debt information voluntarily to a mortgage broker or lender. The lender then estimates the amount of home the borrower will qualify for. Before the borrower gains full pre-approval, the lender must pull your credit report, check your debt-to-income ratio, and perform other underwriting steps. Pre-approval gives the borrower more buying power and extra leverage when making an offer to purchase a home.
4. Don’t forget what kind of spending habits you have when getting a mortgage. By taking out a 30-year fixed rate loan rather than a 15-year mortgage, and investing the money saved on monthly payments, you might earn a higher return on your money in the long run. But, that approach won’t work if you enjoy dinner and a movie twice a week. If you’re a compulsive spender, the 15-year loan would force you to save your money and accumulate equity faster by going with the shorter term and higher payment.
I hope this information is valuable to you! Please feel free to contact me at any time with any questions or concerns!