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Mortgages 101: It’s not as scary as you think

April 13, 2017

Financing a home can seem intimidating to the first-time homebuyer. If you’ve never applied for a mortgage before, don’t be afraid of the process. When you break it down and understand what is involved, you will be prepared to sail through the process! Check your credit report. First and foremost, review your credit report. Your credit score is a major factor in qualifying you for a mortgage and the amount you can borrow. A score of 720, for example, is excellent, and you can take your pick of lenders to secure the mortgage and terms you want (e.g., interest rate, no points). But even a lower score can be acceptable, depending on the lender and the mortgage program. In addition to your credit score, review the entries on your credit report. It’s not unusual to find mistakes, which can be corrected with a letter to the credit reporting company (Equifax, Transunion, and Experian are the top three) or the business that reported the debt. Late payments can also cause a problem when you’re seeking a mortgage. Try contacting those businesses to see what can be done to remove those “black marks”. Collect your financial information. You’ll need to prove your income, which requires two recent paycheck stubs and the last two years of income tax returns. You’ll also be asked for the past two months’ bank statements, so the lender can see how much is in your account as well as how you manage your funds. When you’re preparing to apply for a mortgage, spend a few months in advance ensuring you have reasonable cash flow without overdrafts. If you receive any other income (e.g., alimony, commissions, investments), have the paperwork that documents it. Research your loan options. Mortgages come in all shapes and sizes—adjustable or fixed rate, 15 or 30 years. There are programs to assist first-time homebuyers. Veterans may qualify for a VA mortgage, a low-interest mortgage that requires no down payment. An FHA mortgage is a government-insured loan that requires a smaller down payment and accepts people with a less-than-stellar credit score. Pre-qualify before you start your new home search. Armed with the financial documents, you can contact lenders to be pre-approved for a mortgage. Your pre-approval letter will be submitted with your purchase and sale offer, showing the seller that you can actually purchase the home. Builders usually have a preferred lender. There are many advantages to working with this lender if you are buying a new home or building one. In order to earn the “preferred” status from the homebuilder, the lender has proven himself as a resourceful professional who is committed to helping the buyer. Don’t fear the mortgage process. It’s the pathway to homeownership!