First, you should check your credit well before you begin hunting for a home, and work to increase your score if needed, or dispute errors on your report, since those can take time to rectify. You’re entitled to a free credit report from each of the three bureaus (Experian, Equifax and TransUnion) once a year. If there are errors, fix them. If you want to see your actual FICO scores for each credit bureau, buy them outright (about $15 to $20 each) instead of committing to unnecessary and expensive monitoring when you sign up for a free trial.
While applying for a mortgage, hold off on opening up a credit line or applying for any major loans such as a car loan. You don’t want to open up any lines of credit and you don’t want to close any out. Just keep doing what you’ve been doing. And continue making on-time payments and chipping away at any debt.
Ask home-owning friends and co-workers whether they had a good experience with their mortgage lender. Then check in with at least two or three lenders so you have an idea of what’s out there. In addition to the interest rate and loan terms, have each furnish you with a breakdown of your total costs so you can compare.
Tell your mortgage lender you’d like to get pre-approved. You’ll have to provide paperwork, which can include pay stubs, W-2s, bank statements, tax returns, and relevant loan documents. Once you’ve had an offer accepted on a house, you’ll have to give the lender the address and details of the offer to move forward with the mortgage process. (You could also decide you don’t love that lender and want to go with a different mortgage lender after your initial consultation, If so, you’ll have to go through all the paperwork again and it will require another hard credit check.)
Along with your mortgage payment, make sure you’ve accounted for property taxes, homeowner’s insurance and maintenance costs that average about 1.25% of the home’s value every year. Have home sellers furnish copies of 12 months of utility bills. And when you’re pre-approved for a mortgage take the lender’s top number and perhaps cut 20% off of it so you aren’t stretched to the limit. Another good metric? Find out what payments would be for a 30-year fixed mortgage on the house. If you can’t afford a house based on a fixed-rate mortgage at today’s low rates you need a different house.
Make sure you understand what kind of loan you’re getting, what the payments will be from beginning to end, how much interest you’re paying, and whether you’ll have a fixed interest rate, or whether it will be fixed for a limited time before becoming variable. Also, do you know how much money you’ll have to bring to the closing table with you? Many lenders require you to pay property taxes and insurance up front, and it can surely add a significant amount onto the top of the loan.
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