Preparing for a mortgage application
1. Estimate your home-payment capacity. In order to apply for a mortgage, you should first determine the monthly payment you can afford. Take an inventory of all your monthly expenses and compare it to your monthly income. Use these figures to establish a budget that allows room for a monthly mortgage payment.
- Remember to factor in all of the costs of home ownership, including insurance, taxes, and maintenance. You should also consider the cost of any new furnishings you might want for your new home.
- Seeing how much you can afford per month will help determine the price range for your new home.
- You can use a mortgage calculator to determine how much you can pay for a house based on the monthly payment you can afford.
By determining what your outgoing expenses are, you can begin to establish a working budget.
2 .Calculate your down-payment capability. The standard down payment required when purchasing a house is 20% of the sale price. That means you would need to have $60,000 on hand for the down payment on a $300,000 house. Some banks are willing to work with you on how much you’ll need to put down, but the closer you get to the 20% mark, the better your chances become of being approved.
- With a conventional mortgage, a down payment of at least 20% of the selling price will allow you to avoid buying private mortgage insurance, also known as lenders mortgage insurance. (This insurance serves only to protect the lender.)
- You can use your savings or investments to cover the down payment, including 401(k)s and IRAs. Alternately, you can sell valuable assets like antiques, jewelry, or extra vehicles to get the money.
- You may also qualify for state programs that can reduce the down payment required, particularly if you are a veteran or qualify for low-income home-buying assistance. Investigate these programs by searching online for homebuyer assistance programs in your area.
- You will also need to set money aside for other expenses such as closing and moving costs. Closing costs are fees associated with finalizing the mortgage. They include the cost of obtaining your credit report, as well as attorney fees, underwriting fees and a recording fee paid to a local government for registering the sale.
- Closing costs are usually between 2% and 5% of the sale price of the house, meaning they could be $6,000 to $15,000 on a $300,000 house.
- Moving costs will vary widely depending on how much and how far you’re moving.
3 .Confirm your credit score. It’s important to be fully aware of your credit score and what elements of it are important to lenders. There are a number of free ways you can access your credit score, or you can choose to pay a credit monitoring service to provide you with a copy. Most lenders will not approve a mortgage application for someone with a credit score below 580.
- There are a number of websites where you can get a free copy of your credit report.
- Use your credit report to identify negative information that you may need to explain to a lender such as late or missed payments or defaulted loans.
- As you review your credit report, look for items that are not accurate or should not be on your credit report at all. You can contact the credit bureaus to challenge inaccurate information and ultimately have it removed from your credit report.
- Removing inaccurate, negative information will increase your credit score and improve your chances of being approved for a mortgage.
- You can submit a dispute letter that identifies the erroneous information to the credit bureau to have it removed from your credit report.
- If necessary, you can use a number of strategies to repair damaged credit. See how to repair your credit for more information.
4. Review different programs and requirements for mortgage loans. Homebuyers typically have a variety of options when it comes to choosing a mortgage loan. Many borrowers can qualify for a conventional home loan provided by a bank or credit union. Such a loan is not insured or backed by the government and will require good credit and a 20-percent down payment. Those borrowers who can’t qualify for a conventional loan do have other options:
- VA loans. These are guaranteed by the Department of Veterans Affairs for veterans and their families. VA loans allow borrowers to finance the full cost of the home, meaning that no down payment is required.
- FHA loans. The Federal Housing Administration offers a similar program. FHA loans are guaranteed by the government and offer down payments as low as 3.5 percent. However, you will need to buy private mortgage insurance (PMI) with this type of loan.
- Another option is to get a mortgage loan through the seller of the property. This strategy, called owner financing, allows you to repay the seller of the home directly. However, not all sellers will be willing to do this.