Before you begin your search for a new home, you should get approved for a home loan. Potential buyers that can prove that they are “mortgage ready” are in a better position to negotiate than those that are not. Still, to qualify for a mortgage requires some work on your part and if you do not take this step ahead of time, you will endure a very time consuming and stressful process.
1. Obtain your credit reports. Visit AnnualCreditReport.com to obtain credit reports from Equifax, Trans Union and Experian. These three credit reporting bureaus have dossiers on you, featuring important consumer information. Review each report and dispute wrong or outdated information per the company’s guidelines. Wait 30 to 60 days to obtain your updated reports, then move on to the next step.
2. Score it right. Your credit reports have a large impact on your credit score. Once your reports have been corrected, your credit score should improve. You can do your part by also paying down debt, refraining from opening up new credit accounts and making timely payments. Obtain your credit score from FICO.com. Scores of 740 or so and above put in the excellent category, making you eligible for favorable loan terms.
3. Make a big down payment. Certainly, some lenders may allow you to put as little as three percent down with private mortgage insurance making that possible. However, you can strengthen your borrowing position by putting more money down, a move that demonstrates that you have more “skin in the game.” Put down at least 20 percent and the PMI goes away too.
4. Make more, spend less. If possible, increase your income to demonstrate an improved financial picture. About that raise that is coming in the near future: ask your boss if you can have it now. When you explain why, you boss is likely to comply. Also, keep a lid on your spending. Although some lenders may allow you to have at least 36 percent of your income go toward mortgage and debt service, you are in a better position to be approved if it comes in well below that threshold.
5. Negotiate from a position of strength. If you go into your home shopping with a mortgage approval in hand, you already know how much money you will be lent. For instance, if you qualify for a $200,000 loan and have put $30,000 down, the maximum home that you can afford is $230,000. If you aim for a higher price home, you must get that price down below your threshold. Otherwise, expect to come up with a larger down payment to make this deal happen. Buy within your means — keep in mind that unforeseen expenses seem to always show up.
To qualify for a home loan, you will need to assemble some important paperwork as well. The part of the home loan qualifying process can take time, so be aware what your lender will want from you. You will be given a paperwork checklist from your lender — follow it carefully!
Most mortgage providers will require you to provide W2 forms or earning statements. You can also be expected to hand over copies of your federal tax forms for the past two years. Recent pay stubs will reveal how much you currently make. Include other sources of income such as tips that and dividend payments that you recently received. Expect to show bank statements for the past few months including your checking account and savings. Submit only copies of your paperwork — keep the originals with your records.
Realtor.com: How to Get a Mortgage — http://www.realtor.com/home-finance/buyers-basics/how-to-get-a-mortgage.aspx
MyFico.com: Organize Your Home Mortgage Loan Paperwork — http://www.myfico.com/loancenter/mortgage/step1/organizepaperwork.aspx
Sam Dressler is a UK-based property expert. Visit Hamptons.co.uk for more information.
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