This article is sponsored by CreditRepair.com.
If you’re at the stage of adulting where you’re ready to buy your first home or condo, congratulations! That’s super exciting.
Less exciting, but still very important, is making sure you enter into property ownership fully prepared. Unless you’re a Kardashian, or using an inheritance from a long-lost wealthy relative, you probably aren’t going to pay cash in full for your new place. Instead you’ll be entering into one of the most common financial contracts in America: the home mortgage.
Mortgages have been around for decades, and played a big part in Americans moving from a nation of renters to a nation of homeowners, starting in the 1930s. Traditionally, the borrower (that’s you!) taps a bank or other institution to make up the difference between the money in their savings account and the cost of the house. Then, over many years the borrower makes payments, with interest, until the loan is paid off. Mortgage interest rates have fluctuated a lot over the decades, from a record-low 3.31% in 2012 to more than 18% in the high-inflation early 1980s. Luckily, rates are much more reasonable today.
It’s always better to secure the lowest interest rate you can, of course, but the rate you’re offered by a lender is influenced by several different factors. Here’s what you need to do to set yourself up to secure the best mortgage interest rate you possibly can from a lender.
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1. Be Prepared
Before you ever talk to a mortgage lender, you’re going to need to do your homework. First, gather together all the materials that a potential lender is going to want to see from you. This usually includes several months of past pay stubs for everyone who is going to be on the loan, as well as tax documents for the past 2-3 years. If you’ve been renting a place up until now, put together proof of your monthly rent payments to show potential lenders that you’ve been making payments on time.
You should also gather bank statements for the last 3-6 months. If there are any unusually large deposits or withdrawals on those bank statements that aren’t paychecks, have documents for those transactions, even if it was something as simple as selling your car second hand to a family member or friend or borrowing some money from your cousin. Be prepared to show documentation for everything. If you’re getting help with the down payment in the form of a gift of cash (say, from parents or other relatives), then you’ll need to have a letter or other document from the gifter, showing they don’t expect to be paid back that amount. This will also be important for when you do your taxes for the year, so it’s a good idea to get that in writing now rather than later.
Pull together information about your savings, across all accounts, to show exactly how much cash you have stashed. You should even include your retirement accounts. Ideally you would never have to cash out a retirement account early in order to make a mortgage payment, but it helps to show the lender that you have these assets in your name just in case.
Potential lenders are also going to look at your credit score, which is an important piece of information that helps them decide how likely you are to be able to pay back your loan. The better your credit score, the better the chance that you get a good, low interest rate on the money they loan you.
If your credit score could use some improvement, though, don’t despair. There are several concrete steps you can take to try to improve your credit score before you ever talk to a mortgage lender. Also, if your credit score is incorrect for any reason, take the time to request corrections or file a complaint with the credit bureau before you approach your lender. Finally, a less-than-stellar credit score does not mean that you’re doomed to rent forever. There are lenders who are willing to approve mortgages to individuals who are working to improve their credit, so don’t give up on the dream of home ownership just yet.
Pro tip: If you’re facing higher interest rates because of a low credit score, it may be wise to hold off on the application process until you’ve sufficiently improved your credit score. And if your score is low due to inaccuracies or negative claims, CreditRepair.com can help.
2. Do Some Math
Once you’ve gathered together all your materials in one organized place, sit down with a calculator or fire up a spreadsheet so you can do some math.
Mortgage lenders are going to want to know how much money you have in savings that you are planning to put toward your down payment. Once you’ve figured out how much money you have, it’s time to turn your attention to how much money you need. You may have heard that homeowners should try to put down 20% for a conventional mortgage. If the average sale price for condos in your area are around $250,000, then a 20% down payment would be $50,000. You can look at home prices in neighborhoods where you’d like to buy and then figure out the down payment you can afford. Putting 20% or more down is a good way to show lenders that you are not a risky borrower, which could improve the interest rate you’re offered. A bigger down payment can also often lower your monthly mortgage payments. Finally, with 20% down, there’s a good chance you won’t have to pay private mortgage insurance.
Not every buyer puts 20% down, of course. For some borrowers, this isn’t a feasible amount, especially if homes in your area far exceed price tags like $250,000. Not putting down 20% also does not mean that you won’t be able to get a mortgage loan. If you have a decent credit score, you can often qualify for a loan if your down payment is far less than 20%. There are even some special types of loans for certain occupations, such as teachers or law enforcement professionals, or if you’re buying property in a special revitalization area. Figuring out if you qualify for any of these provisions goes back to doing your homework before you start a conversation with a lender. The more information you have to inform your home ownership journey, the better.
3. Shop Around
Gone are the days where consumers only had one choice for a mortgage lender. These days there are a lot of options to choose from when you’re borrowing money to buy. You’ll want to make the choice that’s right for your situation, but here’s a rundown of several lenders and how they might be a good fit for you.
A mortgage broker is someone who works as an intermediary, going between the borrower (you and anyone else on the loan) and the lender (the bank). The broker gathers together your documents, verifies your credit history, and applies for a mortgage loan from the bank on your behalf. One of the main reasons people choose to work with a mortgage broker is because that individual will shop around for you, looking at mortgage interest rates and other terms from several potential borrowers, instead of only looking at one company or bank.
A retail bank, often a full-service institution, is any one of the big banks you’re probably already familiar with, and can also include smaller regional banks. You can rest assured that any retail bank is regulated by the Federal Deposit Insurance Company (FDIC) and is regularly audited. It is also likely that if you get a mortgage through a bank, the bank itself will service the loan, which means that you will make your monthly mortgage payments to the bank where you got your loan, instead of some third-party company down the line.
If your credit score is less than perfect, or if you’re a bit worried about the down payment amount you’ll be able to pull together, you might want to consider looking to a credit union for a mortgage instead. These non-profit organizations operate like banks, but are owned by the members who use their services instead of a corporation or for-profit company. They are often able to offer easier approval and lower rates. Finally, if you’re looking for more personalization for the terms of the loan, a credit union might be the right choice for your home mortgage.
No matter where your home ownership journey takes you, there are a couple of key things to remember:
- Prepare ahead of time so that you have all the information and documents you’ll need to be approved for a mortgage.
- Know roughly the amount you want to borrow.
- Map out how long you want the mortgage to be and how much money you can put down.
- Last but not least, shop around and go over the fine print before you sign on the dotted line.
Once you’ve done all these things, you’ll be in the best position possible to get approved for a mortgage. Then you can put the champagne on ice and get ready to celebrate like the responsible adult you are!
Be sure to download our free mortgage approval checklist before you start your journey!
Think CreditRepair.com could help you? Check it out to learn how they can help you work to repair, build, and maintain your credit score by working directly with the credit bureaus to challenge any unfair, inaccurate or unsubstantiated items on your credit report, and teaching you how to understand both your own score and the rating system.
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