7 Things to Consider When Applying for Your Mortgage

Preparing to Apply for a Mortgage Buying your dream home while applying for a mortgage can be very exciting, but it can also be frustrating if you aren't prepared or if there are unexpected problems with your credit, the home, or other aspects of the transaction.

Fortunately, considering and preparing for the many different financial requests before applying for a mortgage may help reduce the chances of being rejected or having a problem with the process. It is always advisable to speak with a lender or financial advisor to determine what specific steps you may need to take for your unique situation.

Here are seven questions to ask yourself before proceeding with a mortgage application:

1) What Does Your Credit Report Look Like?

Taking a careful look at the credit report can be a good first step before applying for a mortgage. The total credit score matters, but so do the things that make up that score. If there are delinquent payments, a foreclosure, or other serious issues on the report, additional steps may be required to be perceived as less of a risk to lenders. In many cases, the more issues you can clear up, and the higher the overall credit score, the better.

2) How Much of a Down Payment Will you Have?

The down payment for a home is commonly 20%, but not always. A down payment of 20% will, in many cases, stop you from being asked to pay private mortgage insurance. In some cases, PMI can be very expensive, and many buyers try to avoid it when possible. However, some lenders will finance people with 10% or even 5% down. For an FHA loan, 3.5% down is typically all that is needed.

3) Where is Your Down Payment Coming From?

Your down payment may be a gift for most types of loans, but there will likely need to be a letter from the gift-giver stating that the down payment they gave to you wasn't a loan and doesn't have to be repaid. It may also be necessary for that person to show the mortgage company where the money came from, such as their bank account or an investment account. If the down payment comes from your funds and is not a gift, the mortgage company may see you as less of a risk.

4) Is the Home You Want Within Your Budget?

No matter how good your credit is and how much of a down payment you have, there will be an upper limit for how much of a loan the mortgage company will consider for you. The decision will be depending on several factors, but mainly on provable income, and the amount of debt you have.

Buying a home that is not at the upper limits of what one can handle financially might be a smart move as financial problems can appear at any time. It's not required to purchase a home at the limit of what the mortgage company qualifies you for. The limit you are given does not always line up with what you can comfortably handle from month to month.

5) Which Lender or Program is Right for You?

Different lenders and different programs (FHA, VA, USDA, etc.) can have very different requirements. Understanding what the lender really requires and what kind of program will provide the best interest rate, fees, and terms can help ensure that the best mortgage is obtained. Each situation is different, and should be carefully considered.

6) Should you Shop Around for the Best Rate?

Shopping for the best interest rate makes sense, but also look to see if there are trade-offs that may make a slightly higher rate a better choice. Points, high lender fees, PMI amounts, and other issues can all add up to make a payment or total purchase price higher, even if the interest rate comes down. Getting the best deal overall is key, and there are many factors in addition to the rate that can determine this.

7) How Long Will the Process Take?

Closing on a home with a mortgage generally takes between 35 and 60 days. In some cases it can be faster than that, but it can also take longer if there are any problems. With that in mind, making arrangements to leave your rental or move out of another home really shouldn't be finalized until you're sure that the loan will close and on what date that will be.

Obtaining a mortgage isn't always the simplest part of buying your next home, but it does not have to be a stressful event. With careful preparation and research, you will be able to understand what it takes to qualify and better examine your options.


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