Not everyone can pay for a house in one lump sum payment. For most people, taking up a mortgage is their best chance of owning a home. Before you start looking up houses on the market, you should know if you can qualify for a mortgage and then proceed to get pre-approved by a lender.
A pre-approval letter will help you know the price range of the houses you can afford. It will also help you to negotiate and convince sellers to accept your offer. In this article, we shall discuss some of the things you should do to increase your chances of securing funding, especially if it’s your first mortgage. The following are some of them.
Improve Your Credit Score
Buying a house is a big step. It’s not something that you do impulsively like ordering shoes online. There will be a lot of time between the moment you decide to buy a house and the moment you open the doors to your home. You should check your credit score the moment you decide you want to buy a house. You need to have an excellent credit rating to qualify for a mortgage.
Getting your credit report only takes a few minutes. Do not assume that your credit score is high enough. Most lenders require a minimum credit score of 680 (620 for FHA mortgage loans). Once you know how you fare, formulate measures to improve it even if it is above the required minimum. You should try the following to improve your credit score.
• Reduce your income to debt ratio. Try to pay off existing debts without taking up new ones
• Pay your bills on time. Set up payment reminders or even enroll for automatic payments
Get Your Paperwork in Order
Before you get preapproved for a mortgage, first savings mortgage will have to verify a lot of things to determine how suitable a candidate you are. Lenders will have to review your income, existing debt, asset base, loan repayment habits among other things. To ensure the process moves swiftly, have all the documents you will need when you visit your lender.
The documents your lender will require are:
• Up to date pay slips
• Tax returns for the past two years
• Two years of W-2 forms
• Asset account statements. These include CDs, IRAs, stocks, checking and savings
• Ownership records of other real estates
• Residential history for the past two years
• If applicable, the contact information of your landlord
Boost Your Down Payment
Before seeking mortgage solutions, you should make sure your savings are enough to back your application. Lenders never provide full financing for the property. You will be expected to cover the remaining portion with a down payment.
The industry standard for a down payment is 20% of the value of the property. If possible, you should save enough to raise 25-30% especially if you are going to apply for a substantial amount. The idea here is to show the lender how serious you are. Your commitment will go a long way in convincing them to finance you.
It is, however, important to inform your lender if any part of the down payment will come from another source. Raising a more substantial amount for the down payment may seem like an unnecessary effort, but it could be beneficial. It will help reduce the interest you will pay over the loan period.
Determine How Much You Can Afford
Buying a house should be a calculated move. A mortgage can last over three decades. You should avoid making decisions that will strain you in the future. Sometimes, lenders can offer an amount more significant than what you expected or can afford. Even if this happens, avoid the temptation to buy a bigger house and stick to the price range you had.
When preapproving you for a mortgage, lenders will mostly focus on your income and credit score. On the other hand, you should also factor in things like tuition fees, insurance, and other expenses when taking up a mortgage. The amount that remains after paying your mortgage should be enough to cater for your monthly expenses and emergencies.
Time Your Preapproval
To ensure no time is wasted for both you and your lender, only apply for pre-approval when you are set to go house hunting. This is because pre-approvals are only valid for 90 days. If you get it too early, there will be high chances it will expire before you find a suitable house.
Have Your Preapproval Letter Adjusted by Your Lender if you do not need the Full Amount
As we discussed earlier, you may be pre-approved for an amount higher than you can afford. Ask your lender to adjust the amount on your preapproval letter to the one that suits your budget. This will protect you when negotiating with sellers. If a seller sees that you have been pre-approved for a higher amount, they may not be swayed to reduce their price to match your offer. Also, seeing that amount may tempt you to go beyond the budget.
Advantages of Being Pre-approved For Mortgage
You get a Clear Budget to work with
Once your lender pre-approves you for the mortgage, you will know the specific budget you are working with. This will save you the hassle of pursuing listings you cannot afford.
Increased Negotiating Power
Having a pre-approval letter will significantly improve your ability to negotiate. Firstly, the seller will be more willing to reduce their asking price as they will know exactly how much you can pay for the house. Besides, the seller will also be more confident taking your deal over other buyers as your funding is from a reliable source.
Interest Rate Protection
Economic conditions may change and negatively affect the interest rate lenders will charge. Getting a pre-approval is free. More importantly, it guarantees you a mortgage rate for a specified period. Sometimes the period can last for several months.
When it comes to securing a mortgage to buy a house, planning is essential. From the moment you start thinking of making that step, begin making the necessary arrangements to ensure you have high chances of being pre-approved before you start shopping for a home.