Unless you’re one of the few that has the cash to pay for a home outright – 21 percent of all home sales in 2017 were cash sales – you’ll probably be needing a mortgage loan to make the purchase.
Getting pre-approved for that mortgage will help you to learn just how much you can afford, provide peace of mind and give you a competitive advantage in a seller’s market as it makes your offer more credible. Whether you’re applying for a mortgage in Charlotte or LA, you’ll have to follow much of the same steps. Here’s how to go through the process step by step.
Check Your Credit
Before you even apply, you’ll want to check your credit if you haven’t already. To get approved for an FHA loan, a score that’s a minimum of 620 is generally required. Of course, the higher the better – the higher your score, the lower your interest rate will be. Those with a score of 740 and above can get the lowest interest rates. If your score falls between 620 and 740, you’ll have to pay a higher rate, which means higher mortgage payments – if you can hold off a bit and work on improving that score, you’ll be much better off. Lower scores may not be approved at all or may require a significant down payment.
Reduce Your Debt and Avoid New Debt
No matter what your credit score is like, the less debt you have when you apply the better. While you don’t need to have zero balances on all your credit cards, lenders will look at your debt-to-income ratio when considering approval. If you have a high debt ratio due to credit card debt you may not get approved, or you may be approved for a lower amount. Ideally, your debt payments shouldn’t exceed 36 percent of your gross monthly income. Paying down your debt as much as you can increase the odds of approval and a better interest rate.
Gather the Necessary Documents
Once you’re ready to apply, you’ll need to gather all the documents that lenders require. You’ll have to prove you have enough income to make mortgage payments by bringing documents like pay stubs and W-2 forms as well as copies of your two most recent federal and state tax returns. Those who are self-employed need proof of income like Form 1099s along with tax returns. To prove any assets, lenders typically require 60 days of statements for every bank account with assets used to qualify for the loan, including any IRAs, CDs and other investment accounts.
The lender will also need your social security number and a copy of your driver’s license.
Find a Mortgage Lender
Finally, you’ll need to find a mortgage lender. That involves more than just getting the best interest rate possible. You’ll want a company staffed by knowledgeable professionals who will guide you through the entire process. Shop around – home loans are available from several types of lenders, including commercial banks, credit unions, and mortgage companies. Ask for information about the same loan amount, term and type of loan so that you’re comparing apples to apples. You’ll want to know the interest rate, points, fees, requirements for a down payment, whether PMI is required and how much the cost will be if so.