Before you apply for a mortgage, do these five things

You’ve decided it’s time to start looking for a house. There’s a lot you can do in advance to be prepared for your first visit with your mortgage loan officer. Here are five things you should do before applying for a mortgage.

1. Check your credit score

In general, the better your credit score and your financial history, the better the mortgage rate. You are entitled by federal law to one free credit report (includes a report from the three nationwide credit reporting agencies) annually at www.annualcreditreport.com.

Once you receive your reports, review them carefully.

• What is your credit score? A good rule of thumb if you plan to apply for a conventional mortgage is a score of 680; however, for FHA, VA, or USDA loans, that number can be lower.
• Is the information correct? If not, now is the time to correct any mistakes that appear on your report. Visit the Federal Trade Commission’s page to learn how to dispute errors on your credit report.

2. Figure out your debt-to-income ratio (DTI)

Your DTI is the percentage of your gross monthly income that is used to pay your debts. The purpose of the DTI is to determine your ability to pay your debts without incurring financial hardship. Debt payments may include such monthly obligations as rent, mortgage, auto or consumer loans, credit card payments and student loans. Debt payments do not include utility payments, groceries, insurance, daycare, etc.

A general rule of thumb for securing a mortgage is to have a total DTI of less than 43%. Of that 43%, your housing cost (rent or mortgage payment) should be 36% or less.

3. Figure out your real monthly expenses to estimate an ideal house payment

While your DTI, including your current housing payment (or what you project would equal 36% of your DTI), may still be under that recommended 43% threshold, most people have other monthly obligations.

Make a list of your other monthly obligations such as groceries, insurance, utilities (including phone and internet), subscriptions (such as Spotify and Netflix), childcare, entertainment and fuel, and add up those expenses. American National Bank clients can use the Money Monitor tool in ANB Go to help identify these monthly expenses (and to set up budgets and savings goals).

Don’t neglect that houses require upkeep and repairs; this article from bobvila.com suggests you should set aside 1 – 4 % of your home’s value every year for maintenance. And, emergencies do happen, are you leaving enough in your monthly income for unexpected expenses?

Now it’s time to be honest…how much are you really comfortable spending on your mortgage each month? Use this number as your ideal monthly house payment amount.

4. Determine how much you have for a down payment today

Knowing the amount of money you have earmarked for a down payment helps your mortgage loan officer understand your financial situation, ultimately determining your mortgage loan options. Down payment amounts vary depending on the type of loan. Your mortgage loan officer may be able to introduce you to a down payment grant or loan opportunities and other options for down payment structuring.

If this amount includes a monetary gift from a relative or friend, make sure to document the gift so that it would not be considered a loan. If you already own a home and are planning to use the equity from the sale of that home, you can determine a rough estimate of your down payment by doing some quick research into the sales prices of comparable homes in your neighborhood.

5. Get your paperwork together

It’s time to gather proof of your finances. Your lender will provide you with a full list of required documentation; here are common items you will need:

• Identification information (social security number, birth date, full legal name)
• Residence history (current and previous two years)
• If you are a renter, include the landlord or management company contact information and be able to show you have made rent payments on time for at least one year
• Employment history (current and previous two years – include company names, addresses and your title)
• If you are self-employed, provide a profit/loss stamen for the current and previous year
• Tax returns and W-2s (previous two years)
• Pay stubs (last two months)
• Other income
• Bank, investment and retirement account statements (last two months)
• List of other assets such as autos or other property
• List of monthly debt obligations (use the list you created to figure out your DTI)
• Written explanation of any derogatory information on your credit report

Now that you are prepared, make the call to make the appointment to get preapproved and get ready to find your new home.

Apply Today

To begin your application process, you can either contact a mortgage professional directly, or apply now! We want to make the process easy. And we’ve done it a million times.

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Find your MLO

To begin your application process, you can either contact a mortgage professional directly, or apply now! We want to make the process easy. And we’ve done it a million times.

Contact Us Today

 

Articles contained in our news section are not intended to provide recommendations or specific advice. Consult with a professional when making financial decisions. Once published, articles are not updated; information may be outdated.