Getting a mortgage is one of the more stressful events people go though.
The mortgage process requires lots of paperwork, and patience.
These 10 mortgage tips will make sure the loan process run smoothly.
Tip #1. Check your credit report for errors
You can get a free copy of your credit report once per year at www.annualcreditreport.com. Review your credit report to made sure there are no errors such as wrong addresses, phone numbers, or accounts. You can contact the credit bureaus directly and ask them to correct the errors.
Tip #2. Buy what you can afford
Your debt to income, or DTI. Is the amount of monthly debt payments you have compared to your monthly income. Most mortgages will allow a maximum DTI of 41%, ideally you will want a DTI ratio of no higher that 36%. See how much house you can afford using our calculator. Try not to stretch yourself too thin, if you have a high DTI you will be more likely to miss mortgage payments if an emergency comes up.
Tip #3. If you can afford 20% down you can avoid PMI
Mortgages will require mortgage insurance if you have less than a 20% down payment. PMI is between 0.35% – 1.0% annually depending on the type of mortgage program you choose. FHA loans PMI is 0.85% of the loan amount, and is required for the life of the loan. Conventional mortgage PMI is 0.51% and is required until the loan balances reaches 78% LTV.
Tip #4. You don’t need perfect credit to qualify
Many mortgage programs will require a 620 or higher credit score in order to qualify for a loan. Although, FHA loans are available to people with credit scores as low as 580. However, just because you have a 580 credit score doesn’t mean you will automatically qualify. Lenders look at a lot more than just your credit score. You should have a relatively clean credit history over the past 12 months, with no late payments or collections.
Tip #5. Improve your credit score before applying
Everyone should make sure their credit score is as high as it possibly can be. If you high credit card balances, pay them below 15% of the credit limit. Dispute negative account information with the credit bureaus. Contact your creditors and negotiate a pay for delete. If you have a friend or family member with a credit card in good standing have them add you as an authorized user.
Conventional loans typically require between a 5%-20% down payment. However, there are many Government mortgage programs that will allow you to put less than 5% down. FHA loans require just a 3,5% down payment if you have at least a 580 credit score. VA Loans and USDA loans require no down payment at all.
FHA loans are one of the most popular types of home loans available in 2017. With just 3.5% down it’s easy to see why. Another benefit of FHA loans is that the down payment can be a gift.
Tip #7. Have a little extra cash in reserves
Typically your lender will want to see a couple of months of mortgage payments in reserves. A lender does not want to give a mortgage loan to someone who is depleting all of their savings to qualify. The more reserves you have the better. Having a large amount of savings can sometimes make it a little easier to qualify for a mortgage. A large amount of reserves is seen as a compensating factor, it could help make up for having flawed credit.
Tip #8. Get loan quotes from several mortgage lenders
If you do not shop multiple lenders, you’re doing yourself a disservice. Even if you are sure this is the lender you want to use, getting quotes from other lenders can help you negotiate a better deal. Not every lender will give you the same mortgage rate, or closing costs. This is why shopping multiple lenders is very important. Getting at least 3 or 4 loan offers is recommended.
Tip #9. Choose the right type of mortgage loan
There are many different types of home loan programs available. Conventional loans are usually the cheapest types of mortgage for someone with 20% down and good credit (640 +). VA loans are the best type of mortgage for Veterans who qualify for it. VA loans require no down payment and do not have annual PMI.
Check for first time home buyer grants and down payment assistance programs
First time home buyers may be eligible for grants or down payment assistance. HUD has various state grants and programs listed on their website. Local state, counties, and cities also may have local programs listed on their website. Check your local Government website for more information.
Tip #10. Have you documents ready
The mortgage process requires quite a bit of paperwork, having the documents beforehand can save you lot’s of time. A loan officer will need to verify your income and tax documents. Here is a mortgage document checklist.
- W2’s from current and past employers
- Paycheck stubs
- Bank Statements
- Last 2 years tax returns
- Gift letter (if using gift funds)
- List of your debts
- List of all your assets
- Proof of timely rental payments
- Credit Report
- Profit and loss statements
- Signed sales agreement
- Proof of additional income
- Divorcee decree (if applies)
- Bankruptcy paperwork (if applies)
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.