Preparing For The home loan process
Prior to your loan application, there are several things a borrower can do to prepare for the loan application process. There are also a few things that are very important, not to do before and during the home loan process.
First, know and understand your credit score and credit history
Your credit score is a single numeric grade, while your credit history is a detailed collection of your payment history and other financial information. It is important to confirm that your credit report is accurate. Old or inaccurate information can negatively impact your ability to acquire a loan.
Pay down high balances on lines of credit
You may need to set up a payment plan for any delinquent lines of credit, keeping in mind your debt-to-income ratio. This is the best way to positively affect your credit.
Create a budget and include everything!
This will tell you what size loan you can safely afford and help you save money for a down payment (if applicable) and closing costs.
Monthly bills (include loans, lines of credit, utilities, phones, insurance, etc.)
Costs of living (include food, clothing, entertainment, etc.)
Estimate property taxes (your counties website can help you with this)
Estimate homeowner’s insurance. You may want to get several quotes.
Estimate private mortgage insurance (PMI)
Also consider any potential homeowner’s association (HOA) fees.
Consider your one time only costs in the home buying process
Closing costs (These are the costs associated with acquiring a mortgage. They can include but are not limited to loan origination and underwriting fees, real estate commissions, taxes, insurance, and title and recording fees. These fees must be disclosed to buyers and sellers and agreed upon before the real estate transaction can proceed.
Down payment (amount will depend on the type of loan acquired)
Likely, an appraisal fee
Inspections (inspections are a very good idea, no matter what, however, with some loan products, they are required)
Calculate your Debt-to -Income (DTI)
According to the Consumer Financial Protection Bureau (CFPB) a good DTI target is 36% or less. To improve DTI, either increase your income or decrease your monthly debt. If the first option isn’t possible, then take some time to pay down as many credit accounts as possible. Below is a DTI calculator from the CFPB.
Get A Pre-Approval
To get pre-approval for a loan involves an analysis of your finances and credit history. Once it is determined you can repay the loan, a lender will give you a written commitment to give you a loan for a specific amount and period of time. With pre-approval, you are ready to work with your realtor to find your home. This commitment from your lender gives sellers confidence in your ability and motivation to purchase their home.
It is important to understand that a Pre-Qualification is not the same and does not carry the same weight as a Pre-Approval. A Pre-Qualification is a look at your financials and an indication if you can afford the mortgage. A Pre-Approval is in writing and is an offer to extend a loan.
DO NOT make any financial changes during your homebuying process
All your financials are being examined and monitored during this time. Any changes could adversely affect your ability to close your loan, even if you obtained a pre-approval early in the loan process. With that in mind, DO NOT…
Quit your job, or even change employers. Your stable and verifiable employment and income will be the major factor in determining eligibility. It will also determine the terms of your loan. The more the lender perceives you as a low risk borrower the better the terms they can offer you.
Make any large purchases. For example, a car, major appliance or furniture.
Move untraceable money into or out of your accounts.
Incur any new debt during this time. Don’t even apply for any type of financing or lines of credit. Any pulls on your credit will raise red flags in the underwriting portion of your loan process. Wait until after you have closed on your loan to seek out any additional financing.
Things you can and should do before and during the loan process
- Pay down existing debt
- Pay more than the minimum payment due on credit cards whenever possible
- Use a budget
- Monitor your credit
Remember, buying a home is a process and will take a little time. To be prepared and know what to expect, talk with your lender or mortgage broker, like Hometown Mortgage. We can help you further understand your product options and shop lenders, so you will be offered the best terms possible for your loan. The work and preparation you do ahead of time will make your loan process smoother, less intimidating, and Hometown Mortgage is here to help.