getting mortgage ready guide

Getting Mortgage Ready (For Home Buyers)

You are in the market for a new home and excited about your prospects. Are you mortgage-ready? The sooner you can get all of your ducks in a row, the better the process will go. 

Typically a home buyer will purchase a home using a mortgage loan. Avoid the common delays and obstacles by preparing in advance. 

Securing a home mortgage can be a daunting task, especially if it is your first time; it can feel overwhelming. Here are three simple steps to pave the way to obtaining your home mortgage for your new dream home. Avoid stressful surprises by planning ahead.   

Lending requirements are always changing, usually going through a cycle of leniency and then strictness. Think the years leading up to the 2008 financial crisis as an example of radical leniency. Think of 2010 - 2016 as an example of a period of strictness. Regardless of the current trends in banking regulation, what the lender will take into account is:

    All of these affect your chances for approval. Prepare now, and it will be smooth sailing. 

    Follow these three steps:


    Step #1. Check your credit score

    The first check a bank lender will make is a credit check to get your credit score. You will need a sufficient score to get a mortgage. It is a good idea to have a credit score monitoring system online so that you can keep track of your credit history and score. You will also want to secure your credit through a security system. These two services are typically bundled together. If you have a low score, it will take time to raise it, and you should be in the clear long before you apply for a mortgage. If there is fraudulent or incorrect information on your credit report, it can take months to fix. 

    The most common score that lenders use is the FICO score. It is a weighted formula by the Fair Isaac Corporation that calculates your score based on:

      You are entitled to see your credit score for free once per year. You can do so with each of the credit reporting agencies. Equifax, Experian, and Transunion. Request your free credit report here -  https://www.annualcreditreport.com.


      Base FICO scores range from 300 to 850.


      Minimum FICO Score Requirements
      To qualify for the lowest interest rate currently available, you will typically need a FICO score 760 or higher. A score of 620 is required to qualify for a mortgage loan. 
      A low FICO score, say under 620, may be able to qualify for alternative loan types; however, you should be prepared to pay higher interest rates and fees. You may be able to apply for an FHA Loan, a loan that is issued by a private lender but secured/ insured by the Federal Housing Administration. You can sometimes secure these with a score as low as 580 if you make a required substantial down payment. You can go as low as 500 on your FICO score with a $10,000 down payment. 


      Fix Your Credit Score Rating
      There is no quick solution for a less than optimal credit score, but the following steps will help you to increase your FICO score over a period of time, a range anywhere from months to years! 



      A - Make payments on time
      Payment history is the most significant factor in the equation for your FICO score. It is crucial to get caught up on any late payments long before applying for a mortgage. It should go without saying, make payments on time all the time. You can schedule payments online for almost all of your services. There are money management tools like BillMinder or Mint. 


      B - Pay Down Credit Cards
      When you pay off your credit cards or lines of credit, you lower the overall amount owed or the credit utilization ratio (ratio of account balances to credit limits). Experts recommend beginning with your highest-interest debt and paying it off before the lower interest rate credit. There are different theories on how best to pay down debt, such as combining credit debt into fewer sources overtime and freezing the cards that are paid off. 

      Whichever approach you take, your first move is to make a list of all of your credit card balances and plot a course addressing each of them one at a time. Make the minimum payments on all cards except the card you are focusing on. Pay as much as possible on that specific card until it’s completely paid off, then cross that card off your list and move on to the next best card to target. 


      C - Avoid Applying for Unnecessary New Credit
      New accounts will lower your average account age, which will negatively impact your credit history length metric. Besides, each time you apply for credit, it can result in a small decrease in your overall credit score. 

      An exception to the rule. If you don’t have any credit cards, to begin with, you should open an account to start your credit history. 

      If you are in need of a car loan, be sure to complete your loan application process within as short a period of time as possible. FICO attempts to separate out a search for a single loan (such as a car loan) and applications to open new lines of credit in a short period of time. It does this by recording the time frames during which inquiries occur.


      D - Correct Errors on Your Report
      Inaccurate data (regardless of its cause) can negatively impact your credit score. Check your credit report at least once per year. Use a credit monitoring service online and make requests to fix the data errors via that service. The Federal Trade Commission governs such changes.


      Don't Close Old Accounts
      A closed account will still (and possibly forever) show up on your credit report. Closing an account can have negative impacts on your credit utilization ratio and distort the account history ratio as well. 

      Paying off a credit account will not remove it from the credit history either, it will be included on your report for at least seven years. With deep data not being regulated (as of this writing), it could be obtainable by a lending institution for much longer using deep data mining services. 


      mortgage ready for buyers



      STEP 2: Save up in advance for a down payment & closing costs
      The second step in purchasing your new dream home is to save up for a down payment and any closing costs you may accrue. 


      Down Payment on the Mortgage

      When purchasing a home, typically one would pay for a portion of it in cash (down payment) and take out a loan to cover the remaining balance (mortgage).   

      You may ask yourself: How much do I need to save for a down payment? The answer is … it depends.

      Typically, the higher your down payment, the more money you will save on interest and fees. AS an example, you will qualify for a lower interest rate and avoid paying for mortgage insurance. A down payment that is 20% of the purchase price is optimal. 

      If your down payment is less than 20 percent, with a conventional loan, you will be required to purchase private mortgage insurance (PMI). PMI is insurance that compensates your lender if you default on your loan.

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      PMI will cost you between 0.3 to 1.5 percent of the overall mortgage amount each year. So, on a $100,000 loan, you can expect to pay between $300 and $1500 per year for PMI until your mortgage balance falls below 80 percent of the appraised value. For a conventional mortgage with PMI, most lenders will accept a minimum down payment of five percent of the purchase price. 


      If you cannot afford even a five-percent down payment, an FHA-insured loan may be the only way to go. Because they are guaranteed by the Federal Housing Administration, FHA loans only require a 3.5 percent down payment if your credit score is 580 or higher. 

      What are the limitations of an FHA loan? An upfront mortgage insurance premium (MIP) of a certain percentage of the total loan amount is required, as well as an annual MIP of your loan balance on the note. There are certain restrictions on the types of properties that qualify for the FHA option. 

      There are a plethora of government-sponsored programs created to assist homebuyers in need. One example; veterans and current members of the Armed Forces may qualify for a VA-backed loan requiring a $0 down payment. Consult a mortgage lender about what options are available for your consideration.


      Currently, own a home?
      Current homeowners may have equity in the home that they can use toward a down payment on a new home. Is this you?


      We can help you estimate your expected return after you sell your current home and pay off your existing mortgage. Contact me for a free evaluation!

      Closing costs can sneak up on you!
      Closing costs should also be factored into your savings plan. These may include loan origination fees, appraisal fees, title searches, title insurance, discount points, surveys, and other fees associated with the purchase of a new house. Closing costs vary but typically range between two to five percent of the purchase price. Plan for the highest if possible. 

      If you cannot afford to pay closing costs outright at closing, you can (sometimes) add them to your mortgage balance. However, this means you’ll have a slightly higher monthly payment and pay more over the long-term because you’ll pay interest on the closing fees.

      how to get mortgage ready



      STEP 3: Estimate your home purchasing power

      Once you have an adequate credit score, enough savings for a down payment, and a list of all your outstanding debt obligations, you can assess whether you are ready and able to purchase a new home. You will use your credit report to evaluate some of this data. 


      It is vital that you be realistic about what you can afford! You will also need to be equally rational about what you are able to borrow. These assessments will determine whether purchasing a new home is within reach at this time. How do you determine this?

      Your DTI (debt-to-income ratio) is one of the main factors mortgage companies use to determine if and how much they are willing to lend you, and it can help you to determine whether or not your home purchasing plans are realistic given your current financial situation. It can be brutally honest, and it should be. 


      Your DTI ratio is essentially a comparison of your housing expenses and other debt versus your income. There are two different DTI ratios that lenders consider:

      Front-End Ratio
      Also referred to as the housing ratio, this is the percentage of your income that would go toward housing expenses each month, including your mortgage payment, homeowner’s insurance, private mortgage insurance, property taxes, and association fees. 

      To calculate your front-end DTI ratio, a lender will add up your expected housing expenses and divide it by your gross monthly income (income before taxes). The maximum front-end DTI ratio for most mortgages is 28 percent. For an FHA-backed loan, this ratio must not exceed 31 percent.

      Back-End Ratio
      The back-end ratio takes into account all of your monthly debt obligations: your expected housing expenses PLUS credit card bills, car payments, child support or alimony, student loans and any other debt that shows up on your credit report.


      Pre-Approval
      The back-end ratio only provides an estimate of your purchasing power. You will need to secure pre-approval from a mortgage lender to know your true mortgage approval amount and monthly payment projections.


      How do I proceed to purchase my dream home?
      If you find all this complexity overwhelming, you are hardly alone, and that is where a Real Estate Broker comes in. I help homeowners like you every day and can send you a comprehensive list of homes within your budget that meet your specific needs and guide you through the lengthy and complicated process. 


      It’s never too early to start preparing financially for a home purchase. These three steps will set you on the path toward purchasing your dream home. 

      Don't worry if your assessment is not perfect! There are always options. 

      Give me a call! I'll help you review your options, connect you with one of our trusted mortgage lenders, and help you determine the ideal time to begin your new home search.


      *The above references and descriptions are for informational purposes only. The sources are listed below. It is not intended to be professional financial advice. Consult a financial professional for information regarding your individual needs.

      Sources:

      Bankrate –  What is a good score to buy a house

      Experian -
      Improving credit score

      The Balance – 
      What is a good credit score

      Fox News -
      How to dump PMI

      CNN -
      Front End Ratio - investing

      Quicken Loans Blog – 
      How does credit score effect your mortgage?

      myFICO – 
      Credit Report & Credit Scores

      The Balance – 
      FHA loan pitfalls

      Investopedia – 
      Closing Costs

      The Lenders Network –
      FHA debt to income ratio  

      Consumer Finance -
      What is debt to income ratio

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