1. What’s Your Credit Score?
Like other types of loans, you need a good credit score to qualify for a mortgage. This reassures the lender about your creditworthiness. A high credit score can also help you secure a mortgage with a low interest rate and more flexible repayment terms.
There are two ways to check your credit score:
- Log in to the site of your credit card issuer
- Use a free credit score service such as CreditWise from Capital One or Discover Credit Scorecard
Credit scores tend to vary according to the scoring model used and the credit referencing agency that calculates the score. There are 3 leading credit bureaus. Let’s take a look at how high your credit score needs to be according to their score ranges:
If your credit score is within these ranges, then you can move onto the next step. If not, you’ll have to invest some time in repairing your credit score.
2. How Much Do You Need to Borrow?
The second thing you need to do is determine the size of the loan you need to borrow. This can be done by determining the following
- Your annual income
- The price of the home you want to buy
- Property tax
- Homeowners insurance
- Repair expenses
- Dues paid to homeowner’s association
- Interest amount
Here’s a free resource that can help you determine your mortgage amount: Bankrate Mortgage Calculator
3. What Is the Interest Rate and APR?
Interest payments are a critical consideration when applying for a mortgage. They help determine how much your loan will cost you in the long run. You’ll need to find out about the mortgage interest rate and the Annual Percentage Rate (APR) to check your cost of borrowing the loan.
The Annual Percentage Rate is typically higher than the interest rate. This is because it accounts for the interest rate as well as any extra fees or expenses associated with the mortgage.
The interest rate and APR for home loans tend to differ according to the loan term. This can be between 10 to 30 years. The longer the repayment period, the more interest you’ll pay. It also depends on the type of mortgage you are applying for. These include:
- Conventional fixed-rate mortgages
- Adjustable-rate mortgages
- FHA mortgages
- VA mortgages
- Jumbo mortgages
Unless you qualify for an FHA mortgage or a VA mortgage, I suggest opting for a fixed-rate mortgage. The interest rate for these mortgages does not change over time. This lowers your risk, and your monthly payments remain the same. In the case of adjustable-rate mortgages, these can increase or decrease after a particular period.
Interest rates also change according to economic conditions, so make sure you get in touch with a lender to find out the latest mortgage rate before proceeding.
4. How Much Down Payment Is Required?
Lenders usually require you to submit a certain amount as a down payment when applying for a mortgage. This helps lower the lender’s risk and reduces the chances of default on the part of the borrower. The minimum for a conventional loan is usually 5%, but there are some 3% programs for first time buyers. Those who qualify for a VA loan, can get those with no down payment. And, the minimum for an FHA loan is only 3.5%.
For instance, if you are applying for a typical conventional mortgage valued at $285,000, then you will have to deposit a minimum of $14,250.
Conventional loans with a down payment less than 20% typically require the borrower to pay a Mortgage Insurance Premium each month. As the value of the home appreciates or the loan principal balance is paid down, homeowners can work with their lenders to have that monthly obligation removed.
5. What Documents Do You Need?
Buying a home can be a lengthy and time-consuming process in itself. The last thing you need is a long and drawn out mortgage application process, as well. If you are looking for a head start, then I suggest you organize all the documents you’ll need for filing an application. These include:
- Proof of identity – your passport or driving license should suffice
- Utility bills
- History of tax returns
- Pay slips for the past 3 months and other proof of income
- Bank statements for the past 3 to 6 months
- Renting history – This is applicable if you are buying a home for the first time
You can also get in touch with a prospective lender and ask them if they need any other documents for the application process.
6. Research On Lenders
It’s important you also do some research on prospective lenders for a mortgage. Applying to the wrong lender and getting rejected can hurt your credit score, so you need to be extra careful about whom you apply to.
Take a look at a lender’s requirements, the type of loans they offer, their average loan terms, and their interest rates before you apply. This can help you determine whether you can afford to get a mortgage from a certain lender and improve your chance of approval.
Wrapping It Up
For most owners, a mortgage tends to be the most daunting part of the home buying process. However, knowing how a mortgage works and preparing for it can fast-track the approval. A mortgage is a long-term commitment, so make sure you review your financial situation and the stability of your job before you proceed.
Reach Out to Barbie King
If you need some help figuring out the average costs of buying your dream home when applying for a mortgage, then get in touch with me. I’m a real estate agent based in the Greater Indianapolis area and can provide you with a review of current market trends and real estate price levels.