What You Should Know and Do Prior to Getting a Mortgage

Before obtaining a mortgage loan, there are ten things you should know.

Although it won't be too difficult, getting a mortgage will require some work on your behalf. Here are ten things you should know about and take care of if you intend to borrow money to purchase a house in the near future in order to ensure that everything goes smoothly and that you know exactly what you're getting into.

1. Verify your credit rating.

When you apply for a mortgage loan, lenders check your credit ratings. You don't want to be dissatisfied with what they discover.

A numerical computation known as your credit score is used to determine your creditworthiness. Creditors typically look at the FICO score despite the fact that there are other credit ratings, such as VantageScore and FICO. The range of a standard FICO score is 300 to 850. The closer your credit score is to 850, the more favorable you will appear to the lender. You'll probably have more than one FICO score because FICO provides a range of scoring systems that place different emphasis on different areas of your credit. The Federal Housing Finance Agency (FHFA) stated on November 10, 2020 that it has granted Fannie Mae and Freddie Mac permission to keep utilizing the "Classic FICO" credit score algorithm for mortgage loan underwriting. Therefore, if you're looking for a traditional, conforming house loan, the lender would probably check your Classic FICO ratings.

Your FICO scores, including those that are frequently used in mortgage, auto, and credit card financing, can be obtained for a fee. However, your lender might use a different FICO score or a whole other form of credit score than the ones you receive on FICO's website (remember, there are many distinct types of FICO scores). You can also get in touch with the three main credit reporting firms, Experian, Equifax, and TransUnion, although it's possible that they won't provide you with the credit score that lenders will actually use to assess you. However, if you obtain your ratings from FICO or the credit reporting bureaus, you'll have a better picture of where you stand in terms of credit risk.

2. Examine your credit history.

You should evaluate your credit reports as well. Fortunately, you are entitled to a free copy of your credit report from the credit reporting bureaus once every 12 months if you request one. Visit AnnualCreditReport.com to obtain your free report from any (or all three) of the three major credit reporting agencies: Experian, Equifax, and TransUnion.

After checking the report for faults, take action to update any out-of-date or incorrect information and add helpful information. What appears in your credit reports determines your credit score. Your score may suffer if the information is inaccurate. Remember that lenders analyze your credit history to assess whether you should be charged a higher interest rate in addition to deciding whether or not to approve you for a loan.

3. Become familiar with the various mortgage types.

Before you begin looking for a loan, it is worthwhile to educate yourself on the many mortgage kinds that are available, such as conventional, FHA, VA, and others.

4. Choose between a fixed-rate and an adjustable-rate loan.

If you choose a fixed-rate mortgage, the sum of your principal and interest payments will be the same throughout the duration of the mortgage because the interest rate will not change. Your monthly payment will often be fixed at the same amount each month based on a mathematical procedure known as "amortization," even while you steadily pay off the principal. However, because these costs are escrowed and included in your mortgage payment, this payment may increase if your property taxes or homeowners insurance go up.

An adjustable rate mortgage (ARM) has a rate that can fluctuate depending on the state of the economy and interest rates. If rates rise, your monthly payment will rise; if rates fall, it will decrease.

A hybrid ARM is another choice; it has a fixed rate for a set period of time, such as three, five, seven, or 10 years. The interest rate changes to an adjustable one following the fixed-rate period and stays variable for the balance of the loan term.

5. Choose the length of your mortgage.

The length of a mortgage term (the time it takes to pay off the loan), although might vary, is commonly 15 or 30 years. A 15-year mortgage will allow you to pay off the loan in half the time compared to a 30-year loan, but the monthly payment will be greater. Although choosing a 15-year mortgage will save you thousands of dollars in interest, many borrowers cannot afford the higher monthly payment.

6. Determine your budget for a home.

If you anticipate to make a 20% down payment and don't have a lot of other debt, lenders will typically advise that you look at homes that cost no more than about three times your yearly household income.

Your monthly mortgage payment shouldn't be more than about 28% of your gross (pre-tax) monthly income. This is another fundamental guideline for figuring out how much house you can afford. However, it's possible that these numbers don't exactly represent your actual financial and personal situation.

Use an online mortgage calculator to obtain a ballpark sense of how much house you can buy.

7. Obtain preapproval.

Even if you believe you can afford a particular loan amount, a lender may not share your opinion. Get prequalified for a mortgage as one approach to see how much a lender will actually offer you.

To achieve this, you'll need to give your potential lender some information regarding your earnings, possessions, and debts. On the basis of this information, the lender will then inform you of the potential loan amount. You won't receive a promise from the lender that you'll be accepted for this sum, but you'll get a rough sense of how much you can qualify for while looking for a new home.

8. Do your research before applying for any mortgage loans.

Look around for the greatest home loan deal before submitting an application for a mortgage. You'll need to decide how you want to obtain your loan—for example, through a broker or by going straight to the bank—as well as to shop around for the best interest rate and closing cost options. Always seek advice from multiple sources to find the greatest mortgage offer possible.

9. Complete the application.

You'll need to complete an application whenever you're prepared to close the mortgage arrangement. Information about you, your finances, and the specifics of your potential mortgage will be requested on the application.

When completing the application, make remember to take your time and be truthful. If you give fraudulent or erroneous information on your mortgage application, it will substantially harm your chances of approval.

10. Carefully read the Loan Estimate and Closing Disclosure documents to comprehend the mortgage you've chosen.

If you submit a mortgage loan application on or after October 3, 2015, the lender is required to produce or mail you a document known as a "Loan Estimate" no later than the third working day. A user-friendly "Closing Disclosure" will also be provided to you three business days before the mortgage loan closes. Before you sit down for the closing, make sure to carefully read these paperwork and ask your lender any questions you may have.