Thinking of purchasing a home? That’s a great idea, but you may need to brush up on your mortgage knowledge. There are certain important points that a home buyer should certainly know, especially if it’s their first time. Because applying for a mortgage can be nerve-wracking and stressful.
Everything You Need to Know Before Getting a Mortgage
Therefore, learn about the best practices when applying for a mortgage and what not to miss out on.
Know the Different Types of Mortgages Available
The first step in getting a mortgage is to work out what kind of mortgage is best for you. And in order to determine that, you must familiarize yourself with the different types of mortgages and find the one that best suits you. There are:
- Mortgage Lenders
- Mortgage Bankers
- Retail Lenders
- Wholesale Lenders
- Direct Lenders
- Portfolio Lenders
- Correspondent Lenders
- Hard Money Lenders
- Warehouse Lenders
Once you decide on the type of mortgage you would like, you can approach any of these lenders for pre-approval. A pre-approval is a document that states the maximum amount your mortgage lender is willing to loan to you. You can get pre-approved quite quickly, but for that, you need to be prepared beforehand.
A pre-approval indicates that you are a serious buyer and means that you are ready to move into your new property when you find one.
Read on below to see how you can be prepared with the necessary documentation.
Start with Your Credit Score Report
The first thing lenders will probably do when you apply for a mortgage loan is to check your credit; therefore, you should, too. Good credit is essential to qualify for a mortgage. After finding your credit score, be sure to check it carefully for errors since lenders will use it to determine your qualification limits for a loan.
A good credit score may depend on the lender’s requirements. However, 620 is usually the minimum score you need to qualify for a conventional mortgage, and the rest depends on the type of mortgage you are looking to get.
The reason lenders look for people with high credit ratings is that the higher the rating, the less likely there is a defaulter in repayment. Someone with a high credit rating typically meets their credit card, other loans, or debt repayments on time.
Be Realistic About Your Affordability:
Homeownership may be the dream of most Americans, but your dreams should be realistic. Before you set your eyes on your dream home, make sure you can afford it.
If you’re looking for a rate that will require you to come up with a 20% down payment and you only have about 5%, figure out your calculations based on the rate you’ll be able to get. You can refer to your DTI ratio—for example, a 50% DTI ratio means you spend half of your monthly pre-tax income on debt repayment. Therefore, if your ratio is high, there is a possibility that lenders may think you are not in a position to take on more debt.
As a result, proper calculation is critical, and even better, you can seek the assistance of a professional firm.
Decide on Your Financing Options
There are different financing options you can choose from, and repayment terms include a 15-year or 30-year mortgage. Therefore, determine which is best for your financial situation, whether it is adjustable or fixed, etc., when taking a home loan.
The Larger Your Down Payment, the Better for You
Unquestionably, the more money you put down, the more appealing it is to the lender.
The amount of the down payment will depend on the type of mortgage and the lender. Usually, for conventional mortgages, a down payment of at least 3% of the home’s purchase price is required. But again, to avoid PMI, or Private Mortgage Insurance, you’ll have to put at least 20% down.
Moreover, a larger down payment will lower your loan-to-value (LTV) ratio, which is appealing to most lenders.
Getting Organized with All Your Documents
During the pre-approval phase, it is best to gather the documents needed for your mortgage application. All lenders and lending institutions require proper documentation as part of the mortgage approval process. Preparing in advance will reduce a lot of stress when you find your dream home and actually approach lenders.
1. Income Verification
Verifying your income by lenders is an extremely important step since it will prove whether you can actually support your mortgage payment. You will be required to show your tax returns for the last two years, as well as recent W-2 forms or pay stubs. If you’re self-employed, you’ll need to verify your income with 1099s or profit and loss statements from the past couple of years. Other than that, some citizens receive income from alimony or child support. They will be expected to provide court orders, bank statements, and legal documentation that this type of income is a continuing income.
2. Proof of Assets
Assets, especially additional assets, are a great advantage for getting your mortgage approved quickly. You need to provide proof of your assets, like bank statements for checking and savings accounts, retirement accounts, and other brokerage accounts from the past 60 days.
3. List of Labilities
Just showing proof of assets is not enough. Showing liabilities is equally necessary, and lenders may ask you to provide documentation related to outstanding debts, such as credit card balances, student loans, or any other ongoing home loan.
4. Additional Paperwork
There may be some additional paperwork, but that depends from lender to lender. For example, if you live in a rented house or apartment, your lender may want to see proof that you pay your rent on time. Moreover, some lenders may even wish to see proof of documentation of any sale for which you received cash; (such as a copy of the title transfer if you sold a car), etc.
At Vilt Law, P.C., we treat each customer as an individual and give each the same priority. We use “common sense” to help you obtain the best mortgage possible.
Our professional team is honored to help its clients. Please contact us today to set up a free consultation