Tis the season for home buying! The National Association of Realtors reported that there were 1.55 million active listings on the market coming into 2019 and that 32% of buyers were first-time buyers. If you’re in the market (or even if you’re just interested in refinancing), you’ll want to get in the best financial shape possible before embarking on the loan qualification process. There are different loan products available that can help you meet both your budget and your goals and the better shape you’re in, the better the loan application process will be. If you want to get to the closing table smoothly and without hassle, follow these tips to getting your finances fit for a home loan.
Check your credit reports
Your credit report is a crucial factor in the mortgage application process and a loan officer will pull your credit reports faster than you can say fifteen-year fixed rate. This document reflects your creditworthiness. Think of your credit report as your financial autobiography, one that showcases the highs… and lows. Have you paid your bills on time? How many loans have you taken out? How much do you still owe? Do you have an established credit history, or is it still relatively new? The credit report details your bill paying record and supplies a view into your credit (such as your use of loans or charge cards).
Review the report carefully for any discrepancies, such as a past due payment you know you paid on time or a line of credit that you know you closed years ago. Contact the reporting credit agency or bureau to correct these errors. If there are any delinquencies, you’ll want to take care of them as it will be more challenging to get the loan you wish to with delinquent accounts appearing on your credit report. The fewer the blunders on your credit report, the better your credit score.
Know the score
Unlike the numbers on the scale, higher digits are admirable when it comes to your credit score. Lenders will examine your score and use that information to determine the likelihood that you’ll pay your monthly mortgage payments—and make payments on time. The higher your credit score, the better the interest rate you’ll qualify for; likewise, the lower the credit score, the higher the interest rate.
It’s kind of like the SAT—the closer to 800, the better the score. A FICO credit score upwards of 700 is considered a good credit score with scores below 670 falling into the average range and numbers in the low 600s and below falling into the fair to very poor range.
Knowing your credit score will help you discern if lenders will view you as a credit-worthy applicant or if you need work on improving your score. Some lenders and loan products allow people with fair to poor credit to still qualify for loans; however, those loans often come with exorbitant interest rates.
Have you thought about refinancing your mortgage loan? Maybe you’re not sure if it would actually help move you ahead. Perhaps you are curious as to why anybody refinances their mortgage in the first place.
People refinance for different reasons: they might want to consolidate debt, make home improvements (like finishing a basement or adding a garage), or garner the benefits of paying a lower-interest loan. Still more might want to switch from a 30- year loan to a 15-year loan—the latter lets you pay less interest over time and allows you to pay your mortgage off faster.
Typically, you want to save 1% when you refinance. Take a look at what you’re currently paying in interest, how much life is left on your loan, how much it will cost to close and if it will save you more in the long run to re-fi.
Decrease your debt (and don’t open any new lines of credit)
From credit card balances and car payments to student loans, most Americans have some kind of debt in addition to their mortgages. The amount of debt you owe in contrast to your income is known as your debt-to-income ratio (DTI) and this ratio is yet another principal factor in the loan qualification process. Lenders develop this figure based on how much of your monthly income you spend on monthly debts. The DTI also informs lenders about how much money you can borrow. A high credit score and a low DTI will help you towards qualifying for the best rates.
Some ways you can reduce your DTI include making purchases in cash instead of on credit (to avoid shouldering more debt) and making more (or more substantial) payments on a highinterest debt before making a mortgage application.
Build your savings
Before you settle in with a cup of coffee and a date with Zillow, turn your attention to your savings account. It’s not exactly cheap to buy a house: in addition to the down payment (more on that in a moment), you should expect to pay for house inspections, closing costs, repairs or upgrades to your new home-to-be and general expenses associated with moving. Having more cash on hand can mean less stress and less debt in the days ahead. Plus, mortgage lenders like to see that you’ve been squirreling away funds in your savings account: it demonstrates that you’d still be able to pay your mortgage each month even in times of crisis.
Increasing your savings can also lead to being able to put down a sizeable down payment, which can help you establish equity faster and lower your monthly payment. Strive to bring 20% of the home cost to the table to get out of PMI (private mortgage insurance)—PMI means a higher monthly payment and even more money going towards interest and not the principal of the loan.
local lending experts offer their insights
Interest rates and forecasts
“Rates are still really, really great.” —Valinda Hayes, Member One Federal Credit Union
“Predictions right now are pretty good: no major increases for this year.”—Angie Apgar, American National Bank & Trust Company
“We’ve seen improvements to rates this winter and if that bodes well for this year, we would hopefully see stabilized rates—my crystal ball does have cracks in it, though!”—Cyndi Stulz, Virginia Mountain Mortgage
People tend to worry when they hear that the Fed is raising rates, but they need to hold tight. Cyndi Stulz says that “the prime market is what reacts and influences mortgage rates—not the Fed.”
According to Angie Apgar, while people are more credit conscious than they used to be, it doesn’t mean that everyone’s walking around with a perfect credit score. Lenders can help with credit counseling. “It doesn’t cost anything to let me pull your credit, help answer questions and write to the agencies.”
Valinda Hayes says that she sees many first-time home buyers maintaining an idea that they need “all this money to buy a house—that’s not true. There are limited down payment options, loans for 100% financing—you can ask the sellers to pay your closing costs. Essentially, you can come to the table with no money down.”
All three experts agree: get your paperwork organized! Whether you’re a first-time home buyer or if you haven’t been out in the market for a while, lenders need more information than they used to, so be sure to have bank statements, paystubs, tax returns and other related papers in order.
Talk with a lender
You’d hate to attend an open house or schedule a showing of a home you saw in your dream neighborhood only to learn later that the property is out of your price range or that you don’t qualify for the kind of loan you’d need to buy it. With that in mind, before you find a realtor, find a lender.
Working with a lender from the get-go helps put you on the path to pre-qualification. The lender will run your credit and analyze your financial documents to see what you can afford in terms of a monthly payment. At that point, you’ll receive a pre-approval letter that outlines the amount a lender is willing to loan. Buyers who have been pre-approved are seen as serious buyers and they usually don’t have deals fall through because of lending problems.
You don’t want anything weighing you down and slowing down your home-buying or re-financing process, so take your wallet’s pulse, work out a way to pay down and manage your debt and find your way to financial fitness this season. ✦