About a month ago, I bought a new house! This is the second home I’ve owned, but the new house is my first time owning a single-family home not connected to any other units. I feel so grown up!
I could not have bought such a great home without a mortgage, similar to many other young professionals. As a guy who used to approve mortgage loans and having gone through the process three times myself, I want to share the secrets that bankers don’t tell you about when applying for a mortgage yourself.
Cleanup Your Credit
Your credit score and credit report have plenty of moving parts. It can take 7-10 years for bad information like late payments, missed payments, and debt charge-offs to fall off your credit report, so you should be taking steps to improve your credit year round, even when you do not have plans to buy a home.
To get started, check your free credit report at annualcreditreport.com and get your free credit score from Credit Sesame. Both of those sites are free to use and are a great resource when trying to understand or improve your credit.
Remember that your credit score is made up from many factors, and it is important to pay attention to all of them to build up an excellent credit score. Your credit score affects both your loan approval and interest rate, so never ignore your credit.
When you are within a year of applying for a mortgage, it is a good idea to avoid getting any new credit and keep all of your balances paid off to show your lender how responsible you are with credit. Having good to excellent credit makes getting approved for a mortgage much easier.
Get Your Finances in Order
Once your credit is on track, you should take some time to simplify your finances and gather all of your account information. If you already use tools like Personal Capital and FileThis, gathering all of your statements and balances will be very easy. If you are not already using the, today is a great day to sign up.
This is also a great opportunity to consolidate your accounts if you have multiple checking accounts or savings accounts. This is also a great opportunity to rollover any old retirement accounts and combine investment accounts. Keeping it simple is a great strategy.
Find a Home You Can Afford
Once your finances are in order, it is time to start the search for your home. Try to be realistic when searching for your home based on both cost and the features you want and can afford.
According to Bankrate, you should not buy a home where your monthly cost is over 28% of your monthly income. Remember, your monthly cost includes your mortgage payment plus homeowners insurance and property taxes paid through escrow.
To calculate that 28% figure, divide your annual salary by 12 and multiply by .28. If you make $50,000 per year, you can afford a monthly payment of roughly $1,167. This is just a guideline, so do take into account your personal monthly expenses as well. If you have a big down payment, it will lower your monthly cost, so be sure to consider that as well.
Shop Around for the Best Deal
Once you have found a home, and sometimes when you are just looking, it is time to shop around for the best lender for your situation.
Your best bet for a good experience will be with a large, reputable lender or credit union. My current mortgage is from PenFed credit union, which operates nationwide and has some of the best rates available.
When I was looking for my most recent mortgage, I spoke with two lenders suggested by my agent, a local credit union, and PenFed. PenFed had both great customer service and very competitive rates. I would use them again in the future.
Be Proactive with Your Lender and Real Estate Agent
When you apply for a mortgage, you will be assigned a mortgage officer at the bank who will be your primary point of contact. Building up a good relationship with your banker is helpful if something goes wrong or you need help in a hurry at any point before closing.
Your lender will require lots of forms, signatures, and statements proving you have the assets to make your planned down payment. Having those ready from the steps above makes the closing process much smoother.
Your lender may ask you questions about any negative information on your credit report or any conflicting information between your credit report, recent statements, and your application. It is important to be as accurate as possible to ensure a smooth approval.
If you know of any negative information in your credit history, being open, up-front, and honest will help show that you recognize the past mistake and have changed your behavior to avoid repeating. This can be a good idea before applying for the mortgage. If something on your credit history is bad enough to prevent you from getting the mortgage, you may be able to find that out before paying an application fee.
Be Patient and Responsive
After you apply and provide your financial information, your loan will go to a processor for formal underwriting and approval. Depending on your bank, this may take anywhere from a few days to a few weeks.
To avoid a delay in closing, respond to any requests from your bank immediately. If you are concerned about your credit preventing you from buying a home, you can start early with a pre-approval (not a pre-qualification) from the bank, which will include information on what you can afford and a letter you can provide when you make an offer demonstrating that you will be able to pay for the home.
If everything goes well, your approval will be a smooth, uneventful process. Boring is best when dealing with a mortgage.
Once your loan paperwork is completed, it will be sent to the title company for closing your loan. You will have to sign lots of papers from the lender and title company to make the purchase. Once you do, you will be on track to moving into your next home!
Do you have any questions about getting approved for a mortgage? Be sure to ask me in the post comments, or you can leave me a voice question for an upcoming podcast episode!