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4 Things Every Home Buyer Must Know About Applying for a Mortgage

Updated: 4 days ago

Applying for a home loan is a tedious but necessary process on your journey to homeownership. Wouldn’t it be great if there was a list so that you can be prepared for when you make that phone call to the mortgage broker?


Great news - We’ve got that list and then some!

Below you’ll find the items you need to collect, why you need them, and (best of all) how to get the best mortgage for you.


Documents to Collect


Honestly, it’s not too difficult to gather what a mortgage lender needs to get you pre-approved.


To be pre-approved for a home mortgage, the lender will review all of your financials for the last couple of years. They need to verify that you have a steady (or increasing) income, that you’ve been in the same career field for a couple of years, and that you have reserves after purchasing the home.


Here are the main items they collect:

  1. Tax returns for the past 2 years

  2. Bank statements for the past 2 months

  3. Paystubs for the last 2 months


If you are self-employed they will likely require additional information such as your business's Profit and Loss Statement.


Know Your Credit Score


Did you know that your credit score directly impacts how much interest you will pay over the life of your loan? A higher credit score means you get a lower interest rate. And a lower interest rate means less of your monthly payment goes toward mortgage interest.


For example: A credit score range of 640-675 would get 3.75%, 676-700 would get 3.5%, 701-725 would get 3.3%, 726-775 would get 3.15%, and 776+ would get 3%. Every lender has different ranges, rules, and regulations. But you can see that the higher your score is, the lower your interest rate will be.


If you are right on the cusp of a new range, you may want to consider what you can do to bring your score up just a little bit to get the next best interest rate. Consult with your lender for ideas. Your mortgage lender will pull your official score but you may want to use a free service like creditkarma.com to get a sense of where you are currently.


Understand Debt-to-Income Ratio


In layman's terms, the Debt-to-Income ratio (DTI) is how much money you owe (debt) compared to how much money you earn (income). Why is this important? Mortgage lenders can’t lend you more money once you hit a certain ratio (somewhere between 39-50% depending on loan type).


DTI is essentially a risk assessment tool and helps a lender understand if you are taking on

more debt than they believe you can handle. There are two types of Debt-to-income ratios - Front-End and Back-End. Front-End only includes housing debt, such as mortgage principal and interest, homeowners association fees, property taxes, and homeowners insurance. Most lenders focus on the Back-End DTI that evaluates all debts reported on your credit report. They look at the monthly minimum payments for everything from credit cards, auto loans, and student loans to child support and alimony.


Having a lower debt-to-income ratio not only allows you to borrow more money, but it can also change your interest rate for the better - meaning you have a lower monthly payment. Remember, interest rates are offered based on how “risky” you are as a borrower. The less risky you are, the better rate they are willing to offer.


So how do you lower your DTI? Payoff debts. If you are motivated to get a lower interest rate

and/or qualify for a larger loan amount you will need to pay down or pay off current debts owed.


Compare Rates and Fees


The world of loans is confusing! And I personally believe it’s on purpose. Here are a couple tips to make sure you are receiving the best loan for you.


1. Speak with more than one lender. Lenders are quick to quote their best rate of the day. A

better idea is to submit all of your documentation, have them evaluate it, and give you an accurate quote of what they can do for you specifically. Compare the quotes in-depth

and decide what’s going to be best for you.


2. Compare Interest Rates. This one is obvious. A lower interest rate means you have a

lower monthly payments and less interest over the life of the loan.


3. Compare the Cost of Interest Rates. Interest rates come at a cost. Sometimes there is

no fee. Sometimes they credit you (pay you) to take a higher interest rate. And

other times they quote you an interest rate but you have to “Buy” the rate. Essentially

this is an upfront fee to have a lower interest rate. Make sure you know the rate you are

offered and how much it is costing you to get that rate.


4. Compare Funding Fees. Each lender has their own “Funding Fee” cost. It can be

anything from credit to you (essentially them paying you to borrow money from them)

to several thousand dollars out of your pocket. If you are paying them to fund the loan it

may be wiser to take a higher interest rate and have no fee from a different

lender.


Getting pre-approved for a mortgage is one of the most important steps in purchasing a home. Though we are not a mortgage lender our team of trained real estate professionals are here to answer any additional questions you may have about getting approved, including if you need a referral to a couple of trusted local mortgage lenders. Give us a call today and we can get you on the track to homeownership.


Roger Lee & Donavan McFadden of the Marching 2 More Real Estate team extend our gratitude to potential clients for entrusting us with their real estate endeavors. Your satisfaction and success are at the heart of everything we do. https://www.marching2more.com/work-with-us


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