For most people, there is no more significant a financial transaction in their lifetime than that of a mortgage loan. Despite its importance, getting a mortgage is infrequent enough for the average person that it can be a daunting process. However, it doesn’t have to be that way. In this series we are going through each step on the way to getting your mortgage to better help you be prepared for the process!
The first thing you have to do when preparing to get a mortgage is to evaluate and prepare your finances. This seems somewhat straight forward, but there are several important steps you ought to take to make your mortgage loan application go more smoothly, and to ensure that you get the best rates possible.
First, you will need to obtain your FICO score. We often refer to this as your “debt score” because it serves to tell banks how reliably you pay off your debt, and lets them determine if you are a worthwhile investment. Additionally, you will need to obtain your credit report.
This is your starting point, because you first need to determine if there are any outstanding debts or blemishes on your credit that could hurt you in the mortgage loan approval process. You will need to get reports from all 3 major credit bureaus: TransUnion, Equifax, and Experian. Different companies report to different bureaus, so to get a complete picture you need all three.
Once you have that information, you can take whatever steps you need to in order to clear up your credit report. If you have outstanding debts you were unaware of, this is an opportunity to pay them ahead of seeking a mortgage. Also, you can contest out-of-date or inaccurate information on your report, which can improve your score.
When you have dealt with your credit report, you’ll need to carefully examine your budget. You want to determine what you are looking for in a home, as well as when you can reasonably afford. At this point you’ll need to look at how much you can expect to pay down, what you’ll want available for renovation costs, and factor in the expense of moving.
Long before you enter the bank to apply for loan, you should know what type of house you can actually afford. Just because the bank will loan an amount to you, doesn’t mean you can afford that loan. Being house-poor is not a fun place to be, so make sure when you settle on your maximum home price, that it is a reasonable one.
Having this information in-hand will be helpful during the loan application process, and having run the numbers before you set eyes on the house of your dreams will help bring you back down to earth in those moments when your emotions can try to run away with you.
Once you’ve done all that, you are ready to move to the next step: deciding on your mortgage type.