Buying a home, no matter what market we’re in, can be a very stressful endeavor. Not only can searching for the right home be a challenge, but the process of getting approved for a home loan can be so daunting that it’s enough to keep potential borrowers away from even thinking of buying a home. The good news is that with a little bit of preparation and organization, you can be well on your way to getting that loan you need to close on your new home. the-top-5-ways-to-increase-your-credit-before-applying-for-a-mortgage To increase your chances of success, there are 10 things you absolutely need to do before you apply for a mortgage.
1. CHECK YOUR CREDIT AND CLEAN IT UP.
In today’s credit crunch environment, your credit score and what shows up in your credit report will be a crucial factor to a lender in determining their risk in giving you a loan. The lower your credit score, the higher risk you are to the lender. But don’t get discouraged if your credit happens to be less than stellar. This is extremely important – you have the ability to improve your credit score way before you apply for a loan. Why wait until you get in front of a lender only to get rejected because of something you could have controlled? Be proactive!
The very first thing you need to do is get a copy of your credit report. Everyone is entitled to get a free credit report once a year so if you haven’t gotten yours for the year, go get it. Be mindful of what you sign up for when you get your free copy. There are services out there that will charge you a monthly membership fee unless you cancel within a certain period of time. Although the monthly monitoring of your credit can be helpful, sometimes they sneak it in before you’ve had a chance to think about what you’re actually signing up for.
Once you retrieve your credit report, you’ll need to go through the report with a fine tooth comb. Sometimes, it may be helpful to work with a credit counselor, or even a credit repair agency. They can help you clean up your report by getting the credit agency to correct any errors. The reason why it’s so important to check your credit report and credit score is because this could mean the difference between qualifying for a home or getting completely slapped in the face with rejection. Even if you were able to qualify for a loan with a less than stellar credit, you’ll be paying for it big time with high interest rates (not to mention mortgaging your arm and a leg). This could cost you tens (or hundreds) of thousands of dollars.
Go clean up your credit report. Do whatever you can to get the highest credit score possible. You need to do this before you even look for a house because it could take up to 90 days to get changes made to your credit report.
2. MAKE SURE YOU HAVE ADEQUATE LIQUID FUNDS IN YOUR ACCOUNT FOR A DOWNPAYMENT AND RESERVES.
Most lenders will require you to verify that you have liquid cash that will satisfy the down payment as well as up to 6 months reserve for the monthly housing payment. They’ll usually ask you for the last 2 months of bank statements or a verification of deposit from your bank. So, if you want to buy a house in August, make sure your funds are available by the end of May. If your funds happen to show up within two months of your loan application, you’ll have to verify where it came from. Depending on where the money came from, this could be viewed negatively by the lender. For example, if you had to borrow the down payment, the lender will consider this as additional debt that will affect your debt to income ratio. The more debt you have, the less income you have to make the mortgage payment. Can you see why the lender would be weary of money suddenly showing up in your bank account? Get those funds in your account at least 3 months prior to your loan application.
3. DETERMINE YOUR MONTHLY BUDGET AND HOW MUCH YOU CAN AFFORD FOR A MONTHLY HOUSING PAYMENT.
This is probably the second most important thing you need to do before you apply for a loan (the first being getting your credit report cleaned up). Only YOU can determine what amount you can afford to pay on a monthly basis for housing. Don’t let anyone tell you that you can afford a home simply because the monthly mortgage is X percentage of your income. That’s ludicrous and you would be hurting yourself if you listened to this arbitrary nonsense. It’s one of the reasons why so many people are facing foreclosure and bankruptcy today. They never sat down to determine exactly what they can realistically afford as a monthly payment. Sit down, add up all your expenses (include fixed, variable and contingencies/savings) and subtract the total from your monthly take-home income. Whatever is left over is conceivably what you may be able to afford as your total housing payment.
4. KNOW WHAT’S INCLUDED IN YOUR TOTAL HOUSING PAYMENT.
Your total monthly housing payment is more than just the monthly mortgage. It should also include interest, taxes, insurance, utility costs, condo/HOA fees, maintenance/repair costs, and possibly special assessments. So if your budget is $2000 for a monthly housing payment, that means that all of the above mentioned expenses need to be included in this number. If you budgeted $2000 for your total monthly housing payment and your lender quoted you a monthly payment of $1950, it’s highly likely that the quote only reflected principle and interest. If you add all the remaining expenses that go into the monthly housing budget, you’ll find that the actual number is a lot more than $1950, putting you way over your budget. Save some financial heartache and do your math!