4 tasks to check off your to-do list before applying for a mortgage
Getting the right mortgage loan is important. But to get the perfect loan at the best rate, check these four tasks off your to-do-list before you apply with lenders or commit to taking on debt.
1. Check your credit score
Mortgage lenders focus a lot on your credit score when determining if you are well qualified to borrow at a competitive rate. So make sure your score is as high as it can be.
If you get a copy of your credit report and your score is lower than you expected, see if there are errors affecting your history. Check for late payments that you might ask creditors to remove from your record to help raise your score. And you can also pay down debt to improve your credentials before you try to borrow.
2. Set your housing budget
Lenders tell you the maximum amount they'll loan you. But you may not want to take the largest loan your lender permits, so you can avoid devoting so much of your income to housing.
Before you go to a lender, look carefully at your overall budget and financial goals, and set your own housing budget based on what makes sense for you.
3. Save for a down payment
Most lenders require you to put down at least some money for a home loan. While some allow as low as 3% down, you typically want to do more if you can. It's ideal if you can save a 20% down payment, or $20,000 for each $100,000 in housing cost.
A larger down payment means you don't pay private mortgage insurance (PMI), which protects lenders when buyers make small down payments -- there's a risk the house wouldn't sell for enough to repay the loan in foreclosure situations. PMI can be expensive, and it protects the lender, not you, even though you pay for it.
Larger down payments can also help you qualify more easily with a broader choice of lenders and land lower rates. They also lessen the chance you'll owe more than your home's market value, which creates problems if you move or refinance.
4. Research mortgage loan options
Finally, it's helpful to know what kind of loan you want so you can choose lenders specializing in that mortgage type. Decide if you want a government-backed option, such as an FHA or VA loan, or if you'd prefer a conventional loan. Government-backed loans can be best for less-qualified borrowers because qualifying can be easier, but they often come with charges that conventional loans don't.
Taking these four steps can ensure you're ready to borrow, and are likely to get the right type of loan, in the right amount, at a competitive interest rate. That's crucial when you commit to a debt that's likely to be the largest you ever take on.
Ready to get prequalified? Connect with a First Midwest Residential Lender today.