How to Ensure You Get the Home Loan You Want
My husband and I recently bought our second home. Surprisingly, the process was far more involved than it was the first time around, just six short years ago. Not only did we have to sell the house we were living in, but the application for our new home loan also seemed much more complex and involved. (See also: Top 7 Mortgage Myths Debunked)
If I could go back in time, I'd be sure to keep the following points in mind before applying for our home loan. In the end, it all worked out for our family. We were approved, we found an awesome place, we moved, and we're now happily settling in. However, the more prepared you are from the start, the easier the whole thing will be — trust me!
1. Crunch the Numbers
Before you start searching for houses and applying for home loans, you need to get a solid understanding of your budget.
- How much money are you planning to put down?
- How much might houses need in repairs and maintenance?
- What are any associated fees and yearly property taxes?
- How much are monthly utilities?
- What percentage of your monthly income will a certain loan take from your monthly paycheck?
- What will moving and closing costs add to the equation?
Write it all down or type it out in an Excel spreadsheet. The answers to these questions will dictate the type of loan you seek (FHA, conventional, etc.) and help guide your search. And it's wise to speak with a financial advisor if you're unsure. Be truthful and don't overextend yourself — many loans are 30 years, and that's a long time to regret a decision.
2. Check Your Score
Though the bank will run a credit check as part of the application, if you suspect your credit score might be questionable — be proactive. Start by visiting sites like AnnualCreditReport.com to get your free (yes, free!) report. If you don't like what you see, there are many things you can do to rebuild your credit and improve your overall score.
These actions are worth the extra wait, since better credit often equals better interest rates and fewer bumps in the road. You'll need to keep steady credit throughout the application process, so it's smart to get things in order before you embark. Plus, you may discover things about your financial history (inaccuracies, debt that doesn't belong to you) that need further examination and even change before you apply for your home loan.
3. Gather Your Materials
Whether you're just getting pre-qualified or actually applying for a mortgage, it's a good idea to dig deep into your drawers for any official papers you might need. For example, you'll need to supply copies of your W-2s for the past two years, recent paycheck stubs (usually for a month), as well as any other pertinent information regarding investments and/or large debts. If you're getting any gift money toward closing costs and the down payment, you'll need to submit a gift letter and have the source provide bank account information as well.
If you're self-employed like I am, you may even need additional documentation, like previous years' tax returns (extended versions), bank records showing payments, backed-up employment verification, and more. Generally, it's an excellent idea to contact your loan advisor from the start and make sure you have a list of what's required and avoid packing any documents you might need. Don't forget to keep personal papers in reach, too — you'll need several forms of identification (social security card, license, birth certificate, etc.) when you sign.
4. Keep It Steady
This one's quite simple: Now is not the time to buy a car, take out a personal loan, charge up your credit card, or do anything else that might otherwise significantly change your financial standing during the mortgage review period. Just say no.
Shifting money in big ways can impact your credit score and put you in jeopardy for snags and even loan denial. In fact, many banks like to see some additional savings in your accounts to show that you're stable and not living paycheck to paycheck. So, avoid making any missteps by postponing big purchases and saving where you can.
5. Plan for Surprises
Closing costs are a big deal in my home state (New York). In fact, typical closing costs can make up between 2% to 5% of the overall loan value, including things like legal fees, taxes, inspection costs, survey fees, title insurance, loan origination fees, and many more small print items. Though you may be ready with your down payment amount in hand, you likely won't know exact numbers for additional costs until days or even hours (yes — hours!) before you sign. If you receive a rough estimate, plan for the worst-case scenario.
Additionally, if you run into any delays in your home buying process, you may need to repeat any part of the application process over again. Many things — like bank records, stubs, and other financial documents — expire in 60 days. If you go over that time, it's like a brand new game. I can't express enough that keeping in close contact with your bank, attorney, and real estate agent is key to ensuring everything stays on track and surprises stick to a minimum.
Do you have any items or ideas to add to this list? What did you find helpful when you were applying for a mortgage?