Home Sweet Loan: 6 Insider Secrets to Secure Your Mortgage

Among life's most exciting events, buying a home ranks very high. It's also probably the most expensive event of your life. Getting a mortgage is a must unless you have a swimming pool full of cash and can buy a house with no money down. Applying for a mortgage can make everyone a bit anxious, especially if you're applying for the first time. But we've got you - if you follow these six steps, you will be well on your way to achieving your goal.

Check Your Credit Reports

A smart first step before going too deep into a mortgage application is to check your credit reports. Your ability to get a low interest rate or even approval for a home loan relies heavily on the health of your credit. Before anything else, pull your credit reports from any major credit bureau. The next step is to check your credit reports for any mistakes or accounts listed that do not belong to you (because these might have damaged your credit). Check if your personal information - name, address, and Social Security number are correct. Also, make sure that the amount and status of all the loans and credit accounts that are listed on your reports have been reported properly. Double-check that there is no signal of possible identity theft - you can do so by making sure no mysterious accounts are opened.

If you find any mistake, go to the website of the relevant bureau and file a dispute. Within 30 days of receiving your dispute, the bureau must conduct an investigation and provide a response. Keep an eye out for any negative items which can harm your credit score. For example, bankruptcy, delinquent payments, liens, accounts in collections, and too many credit inquiries. Even though factual entries cannot be disputed, you can remedy them before the mortgage application.

Improve Your Credit Score

That brings us to the second step - unless it is in perfect condition, you should invest some effort and time to improve your credit score. For the majority of traditional mortgage lenders, a credit score between 620 and 640 is considered the bare minimum. Borrowing with a credit score as low as 500 is possible with certain government-backed loans, but only if you meet additional criteria. However, your loan will be more affordable with a higher score.

Paying off your debts on time and in full is a great method to improve your credit score. Payment history is the most important factor in your credit score - it makes up 35% of it. Another 30% of your score is determined by the ratio of your total debt to the total credit extended to you, so it's smart to have a low debt-to-credit ratio.

Last but not least, a few months before your mortgage application, refrain from making any large purchases or opening new lines of credit. Doing so might harm the number of hard inquiries and the average length of your credit history.

Choose the Right Type of Mortgage

Before settling on a mortgage loan, it's important to weigh your options. Here are the different types you should consider:

Conventional vs. government-backed. 

These are two primary types of mortgages. The first one is a conventional one, offered by institutions like private banks, credit unions, or even online lenders. The down payment and eligibility requirements for this type are often higher. Homebuyers with less-than-perfect credit or little savings can qualify for a government-backed mortgage and buy a home with a USDA, VA, or FHA loan. Loans are still borrowed from individual lenders, but the federal government insures the funds. This way, loans are much less risky to the banks, making them more willing to secure you flexible terms.

Fixed vs. variable interest rate. 

Choosing an interest rate that stays the same during the loan's duration, or one that can vary is another important factor to think about. As Brisbane mortgage broker states, fixed-rate loans give you stability and certainty and protect you from rising interest rates. However, it can limit your flexibility when it comes to making extra repayments or switching to another loan. Variable interest rate loans, on the other hand, are often more affordable in the early years of a loan. But keep in mind that the rate will reset at least once throughout the loan period according to market conditions. This means your mortgage payments can become unaffordable in the future due to a rise in your interest rate.

Shorter vs. longer term. 

The term of your loan is the last factor to think about when deciding. On the one hand, you can save money on interest by paying off your loan sooner with a shorter term of 15 or 20 years. But it also means your monthly payments will be much higher, which can cut into your budget. The second option is to have the loan term extended to 30 years or longer. This makes monthly payments more affordable, and you can even borrow more - but extending the repayment period also increases the total amount of interest paid.

Calculate How Much You Can Afford

To determine the type of mortgage you can qualify for, it is important to know exactly how much money you have. First of all, work out the net income for your household. The next step is to determine your basic monthly outgoings - things like food, transportation, insurance, bills, monthly phone contracts, and healthcare. Mortgage lenders will need this information while reviewing your mortgage application.

Gather Documentation

The mortgage approval process involves a lot of documentation, so it's smart to collect all of the necessary documents before you apply. First, you'll need proof of income to support your mortgage payment. Be prepared to provide lenders with your most current W-2 or pay stubs, as well as your tax returns from the last two years. Court orders, bank records, and other legal documents proving your continued receipt of alimony or child support payments are also required if you receive any of these.

In addition to income, mortgage lenders also look at assets when deciding whether to provide a loan - these can secure you a mortgage. Bank statements for the last 60 days are required for all accounts, including checking, savings, retirement, and brokerage. Credit card balances, student loan details, and any existing home loan paperwork can also be requested by lenders. Finally, some lenders require additional documentation, so make sure to check that part.

Shop Around for the Best Deal

The final step, after taking care of all previous, is to apply for a loan. But you shouldn't rush into a deal because you're excited. It takes time and effort to find the best mortgage lender and loan offer, so be patient. Pay close attention to interest rates, origination fees, mortgage insurance, discount points, and other expenses that can add thousands of dollars to your loan. Compare the actual cost of a mortgage by examining the annual percentage rate (APR).

Although there are several steps involved in buying a home, securing a mortgage is an important one. Make sure you give yourself plenty of time to think about all of your possibilities. Remember that being locked in a costly debt for 30 years is no small feat.