Buying a home might be one of the biggest purchases you’ll ever make. Since buying a home entails more time, energy, and capital than purchasing other items such as new appliances, it’s wise to be as prepared as possible. This is especially true when it comes to applying for your mortgage.
To ensure you properly line up your financing, here are a few steps to take before applying for a home mortgage:
Determine a budget
What should I do before applying for a mortgage?
The first step is to determine a budget. You’ll want to identify a budget that you can reasonably afford and won’t leave you feeling deprived. Make sure you can pay your bills, cover other lifestyle costs, and save for your other financial goals like retirement.
To get comfortable with a mortgage payment, you may want to begin setting aside the estimated payment amount a few months before you begin applying for a mortgage. By acting as though you’ve started to make mortgage payments, it gives you time to adjust to the added costs and make any modifications as needed.
Determining a budget before you apply for a mortgage will ensure you don’t take on a loan larger than you can financially handle.
Review your credit score
When determining your eligibility for a loan, mortgage lenders will review your credit history among other factors to gauge how financially responsible you are.
According to Experian, a credit score above 800 is considered exceptional and a credit score above 740 is considered good, while a credit score below 669 is considered fair, and a poor credit score is below 579. The higher your credit score, the more favorable rates you’ll receive. This can save you thousands of dollars over the life of the loan.
What if my credit score is low?
If your credit score is low, there are a few steps you can take to increase it.
First, you should improve your credit history. This means making all of your payments in full and on time throughout the life of any loans or payments you have.
The second is to maximize your credit utilization. Part of your credit score is measured by how much of your total credit you’re using, and you should always use less than a third of what is available to you. Therefore, if your credit card limit is $9,000, you should strive to use less than $3,000 at a time. You may also want to strive to pay off your revolving debt balances. By decreasing your revolving debt balances, you can lower your credit utilization rate.
Finally, an easy way to boost your credit score is to avoid taking out new lines of credit or closing old ones. Your credit history should show consistency, and by opening and closing new accounts, you may damage your credit score.
Gather required documentation
You can prepare to apply for a home mortgage by ensuring you have all the documents you’ll need. To receive pre-approval, you will be required to show a series of documents before formally applying for your home loan. These documents will prove your income and financial situation.
The first documents that you should have available are your proof of consistent employment and income. This typically means that you’ll have to show a pay stub from the last 30 days. This should also show your year-to-date income.
You’ll also want to have your first two pages of your tax returns from the last two years. If you’re a W-2 employee, you should be able to show two years of your W-2 forms, which are typically included with your taxes. If you’re self-employed, you may have to show other documents that prove you’ll be able to afford your house payments.
Then, you’ll need to prove your residential history. This typically means any leases from the last two years or proof of your previous home. If you’re renting, you may need to prove that your lease is ending or that you’ll be released from your lease when you buy the home. This is intended to prove that you’ll be able to afford the mortgage payments and will not also be tied to a lease.
Finally, you should be able to show proof of funds for a down payment. This might be reflected in your bank statements but may also include a gift statement or a money order. You should plan to pay anywhere from 3.5% to 20% of the home’s overall cost as a down payment.
Establish a down payment amount
When you know how much your home will cost, you can figure out what your down payment will be. This will give you a savings goal ahead of applying for a mortgage. The typical down payment on a conventional loan is 20%. Therefore, if you plan to purchase a home that sells for $300,000, you’ll want to pay $60,000 upfront.
If you don’t have the savings to pay 20% down, there are Federal Housing Administration (FHA) loans available as well. The FHA loans help to decrease the amount that you have to pay upfront, but you’ll likely be subject to paying mortgage insurance and higher monthly premiums throughout the life of your loan.
The larger your down payment, the smaller your monthly mortgage payment will be. While it might be a good idea for some to take out an FHA and start building equity in a property, others may want to wait until they can pay a larger amount down before applying for a home mortgage.
Budget for closing costs
As you prepare to apply for a mortgage, you should also save for any closing costs. You’ll save for closing costs in addition to your down payment. While you won’t be able to calculate your exact closing costs before applying for a mortgage, your lender and realtor will communicate what costs you’ll be responsible for before you close on your home.
It’s wise to anticipate that closing costs are typically 2% to 5% of the total cost of the home’s purchase price and cover legal fees, appraisal fees, taxes, and more. You’ll be expected to pay your closing costs when closing day arrives, but you may want to have this money set aside before applying for your mortgage.
The bottom line
Buying a house is an exciting investment. Be sure that the first step in the home buying process goes smoothly by having the correct documents and budget prepared to apply for your mortgage. When you prepare the details early, you’ll set yourself up for an easier closing process and a more secure financial future.
And once you’re finally in your newly purchased home, be sure to keep it protected with home insurance from Progressive.