What is a Mortgage? – Part Three

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Now that we’re familiar with different mortgage terms, we’ll start looking into how to actually get a mortgage.

Prior to choosing your mortgage plan, be sure you understand your personal financial situation and how lenders evaluate your credit worthiness in order to maximize your chances of getting the mortgage you want. Most lenders generally require borrowers to have a debt-to-income ratio of 28/36. Meaning, no more than 28% of your total monthly income can go towards paying off mortgages and no more than 36% of your monthly income can go towards your total monthly debt (including the mortgage payments). Lenders will also pay lots of attention to your employment history to ensure that you have a steady income with a single employer for the last two years (or at least in the same industry/field). Other earnings from part time or freelance work count as well as long as there’s a well-established two year history of stable income. While not having this doesn’t necessarily mean you won’t get a mortgage, you might end up having a higher interest rate. Last but not least, lenders will look closely at any late payments during the last two years of your credit history and also any late credit card payments in the last six months. Generally speaking, you’ll also want a credit score at least above 760-850 to qualify for better loans.

This brings us to the differences between getting pre-qualified vs pre-approved.

  • Pre-qualification: A lender has estimated what you can afford to borrow based off of your income level, debt, and credit information.
  • Pre-approval: A lender has actually pulled your credit report, checked into your debt-to-income ratio and is closer to directly getting you a loan. You should always opt to get pre-approved.

Once you’ve gotten pre-approved and have chosen a mortgage plan, it’s time to actually apply. We generally recommend getting everything prepared prior to the application stage, so that you can get approved for the mortgage as promptly as possible. While different lenders may require further documentation and information, here’s a list of the most common things you’ll need for the application process:

  • Full name, birth date, and social security number of all applicants
  • Your marital status and how many children you have
  • Addresses of placed you’ve lived at for the past two years to establish your residence history. If you rented, you’ll need to show your rent payment. If you owned, you’ll need to submit all mortgage, insurance and tax figures.
  • Complete name and address of your landlords for the past 24 months for references
  • Name and addresses of all employers from the past 24 months for references
  • The previous year’s W-2 form
  • Recent paystubs to establish a steady income
  • Your tax returns from the past year
  • Additional assets such as your checking and savings accounts, retirement accounts, stocks, bonds, real estate, etc.
  • A list of all debts you have including but not limited to credit cards, student loans, car loans, etc. This will be used to establish your debt-to-income ratio.

With enough preparation and research, you should be well on your way to getting that perfect mortgage! Best of luck!

 

Other Tips:

  • Figure out what kind of house you can afford before you even start looking for homes! It’s not worth the aggravation to find your dream home but then not be able to afford it.
  • Familiarize yourself with the mortgage terms we’ve outlined in this guide before you go shopping for loans so you don’t get taken for a ride.
  • Choose between a FRM or ARM by considering how much risk you’re willing to take and also how long you want to stay in your purchased home for (aka how long you want to keep the loan for).
  • If you’ve chosen a FRM, stay vigilant on interest rates because if there’s ever a drop you can always consider refinancing.
  • Confine your search for a mortgage to a 14-day window. Unfortunately, if you apply for mortgages beyond this time period, then all the credit inquiries could temporarily lower your credit score.
  • Use the loan estimate provided by each lender to compare costs before you commit. The loan estimate will provide a statement of your potential loan’s terms and costs. This will help you get the best deal!
  • Put down in the minimum 20% down payment so you can avoid paying for a PMI which can save you some money in the long run.

Missed the last two parts of the blog post? Don’t worry, check out the first part here and the second part here!