If you’ve already decided you want to buy a home, congrats! Many of us consider it a milestone in life. However, you need to be fully prepared before taking this next big step. Here are the steps you need to take so you are completely ready to take on that mortgage loan.
1. Ask yourself, are you really ready?
A house will probably be the most expensive thing you will buy. It’s an investment, but a risk at the same time. Why? Because house values could fluctuate depending on where you live. Also, there’s the possibility that you might not really like your home. So you need to be fully to be committed to this decision. If not, consider other options like renting. It’s not always a bad idea. In some situations, renting can even be better than owning a home. If you do decide to buy a home, take your time, be realistic with your budget, and don’t settle until you find that one you house you absolutely love.
2. Check your credit score
Your credit score will greatly determine whether you get a mortgage loan or not. It’s one of the first things lenders look into to determine your level of risk. This is why it’s important to be good with your loan payments. Let’s say you have a credit card. Do you pay it on time or are you always late? That alone will affect your credit score.
If you have other loan payments, assess how well you have paid these and it should give you a good idea what your score is. If not, you can always call Experian, Transunion, and Equifax. These are credit bureaus that keep a file about your credit record. The higher your credit score is, the lower your interest rate on the loan will be. You might even be able to increase your score if you find mistakes you can dispute. The slight increase may not seem like much but it can mean hundreds of dollars saved on interest for that one loan.
3. Decide financing periods
You have options for how long you pay for your mortgage. There’s 15-year mortgages, then there’s 30-year mortgages. You can also choose between adjustable or fixed rate. If you want a guarantee that payments remain the same throughout those years, opt for a fixed rate mortgage. However, if you think the mortgage rate fluctuations could work in your favor in lowering interest rates, then go for an adjustable rate mortgage. The best mortgage is one that works for your situation so decide wisely.
4. Save for that downpayment
If you’re still far off from getting a mortgage loan, start saving for that downpayment. The more money you have for a downpayment, the smaller the loan you will need. This also gives you more flexibility in terms of monthly payments.
A good down payment amount to have is at least 5% of the purchase price. If you can save 20% of the amount, even better! When you increase your down payment, lenders are more likely to approve you for a loan since you’re not borrowing a too large of an amount.
Preparing your paperwork
You’ll need to organize a lot of documents to prepare applying for a loan. Most of these documents are required to help prove that you are qualified to make that mortgage payment every month. Before you apply, make sure you have all these documents in hand:
- W2 statement
- Federal tax return in the last 24 months
- Most recent bank statements with a balance higher than the amount of the down payment
- Most recent paycheck slips
- Proof of income
- Proof of investment income
5. Get preapproved
This will increase your chances of getting approved for a home loan. First decide how much you want to borrow as this will determine the amount you’re getting preapproved for. Then, prepare the required documents such as income and asset information. The lender will verify this information before approving you for a certain amount within a fixed time frame.
So how is this any different from applying for a loan? Well let’s say there’s two of you bidding for the same house. You got pre approval while the other buyer doesn’t. Who do you think the seller will favor? The one who got verified of course! because it shows that you have less chances of getting turned down for the loan.
Got any other tips for preparing one’s finances for a mortgage? Share your thoughts in the comments below.