Buying a home, especially for the first time, is a process that comes with a lot of questions. You have to figure out where you want to live, how much house you need, what you can afford, which home features are deal-breakers and which aren’t, and who you’ll go to for mortgage financing. You’ll even need to decide whether you work with a mortgage broker or go straight to the lender. And, once you finally meet with a lender, they’ll have a whole new set of questions to ask you — which will probably leave you with another round of questions. In order to help your home buying process go as smoothly as possible, preparedness will help, as will some education. Let’s start with one of the more important factors: your finances. Before you meet with a lender to talk about financing, it’s a good idea to know what your money situation is. Start with these tips for preparing to meet with a lender:
Understand Your Debt — All Of It
No matter which type of mortgage financing you choose — and yes, there are several options, even if you don’t qualify for all of them — the lender is going to ask about your debt. So, one of the first steps should be figuring out just how much debt you have. This means debt in any form, including school loans, credit card debt, even the loan you took out when you bought your last vehicle. Having a mixture of different lines of credit can be beneficial, as it shows potential lenders that you are responsible and likely to pay back the money you borrow. However, some forms of debt are considered “healthier” or better debt than others. For example, a lender is likely to offer a better interest rate if the bulk of your debt is student loans than they would offer if most of your debt is charges to your credit cards. Student loan debt is generally viewed to show responsibility where large amounts of credit card debt can imply that you aren’t as financially savvy as a lender would like.
This is also a prime opportunity to pay down some debt. Lenders will look at how much debt you have, the types of debt you have, and how much debt that is in comparison to your income. So, if you have the time and ability to do so, put a concerted effort toward paying down or paying off as much debt as you can before applying for a loan. A lower debt-to-income ratio will typically help you qualify for a better interest rate.
Do You Know Your Score?
Along with debt, another major factor in getting approved for a loan (and in the interest rate you’re offered) is your credit score. It may feel like an arbitrary number, but credit scores were developed to help lenders determine how safe of a risk an individual is. Your credit score is a combination of different factors including how many lines of credit you have, how old or new those lines of credit are, how much debt you have in ratio to how much you’re approved for, and your payment history.
While credit reporting agencies don’t release the exact formulas and weights that each category gets, there are some common sense steps you can take to help improve your score. If your credit score falls into the “low” range, it will be harder to get approved for loans and if you are approved, your interest rate will be higher. Generally, the higher your credit score, the more likely you are to be approved and the better the interest rate.
With that in mind, checking up on your credit score should not be a one-and-done step. Pay down debt where you can, as we mentioned above, but also try to avoid adding to it. This is particularly important to remember once you’re under contract on a house. Every time you open a new line of credit, it affects your credit score. And, what many people don’t know is that your credit score will be pulled once more just before you close on the house. So, pay off debt and keep saving as that will only help, but hold off on any major purchases or opening new lines of credit. A lower credit score and a higher interest rate than you expected is a pretty unpleasant shock.
Follow The Money
Each different mortgage financing option will have different requirements about income and gift money. Some loan options allow you to have a down payment that is entirely from gifted money and some don’t allow any gift money to be used at all. What you need to know before meeting with a lender is that you’ll need to show proof of all your income. This includes anything you make at work as well as any money you may pick up by freelancing or running your own business. If you own your own business or you’re self-employed, there are even more hoops to jump through. Since your income isn’t like to be as steady, lenders see the self-employed and freelancers as higher risk borrowers. It doesn’t necessarily mean you’ll be charged a higher interest rate, but it does mean you’ll need to be prepared to show more documentation about your income.
Once you have all of that information gathered, it’s time to start talking to lenders! We suggest starting with a mortgage broker, as they work with multiple different lenders and can teach you about a range of different loans and options. Contact the mortgage financing team at Patriot Home Mortgage today to learn more!