Most first-time homebuyers aren’t familiar with the financing process when they apply for a first mortgage. And why would they be? They’ve never done it before.
But failing to understand what’s required of a mortgagee in advance, especially with regards to creditworthiness, is a bad idea.
If you’re a first-time homebuyer completing the mortgage process probably seems like the most stressful part.
But it doesn’t have to be.
The following article will shed some light on evaluating your own credit so you can make a smart decision about buying a home.
The Truth About How Lenders See You
Today’s homebuyers have more mortgage loan options than ever before because the Internet has made it easy for people to access multiple lenders from the comfort of their couch. But when considering your loan options you must decide which type of lender is best for you before you start the application process.
Think about the following when choosing to apply for a loan with a financing agency.
Online Lender vs Going into a Bank
Is quick, digital communication more important than face-to-face interaction? If yes, then an online lender may be right for you. But if you need personal attention it could be advantageous to seek out local options.
To some first-time homebuyers, online lenders may feel impersonal.
To others, going to a bank during banking hours may be inconvenient.
It’s a good idea to weigh the pros and cons of partnering with an online lender vs a brick-and-mortar institution and deciding what is best for you.
Access to More Lending Sources
An online mortgage provider may have access to more lending sources than a typical bank selling only their own loan products.
But, more doesn’t necessarily mean better. As a first-time homebuyer, you have to take into account things like interest rate, points on the mortgage and whether or not the company is going to sell your loan to another lender.
After choosing the best type of funding source for your first mortgage, you’ll need to start the application to get pre-approved so you can start shopping.
Once you’ve selected the home of your dreams, the lender will take into account three main attributes that will determine whether you will make it through underwriting and secure the funding.
- Creditworthiness: This refers to your credit score, good, bad or ugly.
- Debt-to-income (DTI) ratio: The DTI gives mortgage lenders an idea if you can truly afford to take out a loan based on previous spending and total household income.
- Availability of collateral: This includes non-liquid assets that can be leveraged against a mortgage.
These items give lenders a holistic picture of you are as a consumer and potential first mortgage grantee.
Determining creditworthiness is a critical part of the whole underwriting process.
We’ll show you how to clean up your credit in advance, so you can ensure yours is in shape for your first mortgage.
In general, having good credit means getting a better interest rate on your mortgage loan. Most people pull their FICO credit score in advance of applying for a loan to get an indication of what their credit score might be.
Different loans have varied minimum score thresholds. These start around 580 for FHA and 620 if you’re going the conventional loan route.
Regardless of loan type, here are a few things you need to consider when making sure your credit is in order for your first mortgage:
Check Your Credit Report
The first thing anyone thinking about a mortgage should do is check their credit report.
This report provides credit scores in all three of the largest credit reporting agencies: TransUnion, Experian, and Equifax. It will also let you know if any fraudulent financing transactions have occurred under your name.
Sometimes errors occur on a report that aren’t the result of fraud but can still impact your overall creditworthiness. It’s estimated 1 in 5 credit reports contain some kind of error.
With numbers like that consumers have to protect themselves, their creditworthiness and their ability to get a first mortgage by being proactive about checking the report.
Avoid High Dollar Credit Transactions
From the moment you decide that you will be taking on a first mortgage, it’s important that you freeze making large credit purchases.
Any big credit purchase you make will affect your DTI and could be the difference between getting a loan or not. Lenders typically approve mortgagees whose payments to debtors are less than 43% of their total income.
Adding a new payment anywhere in the process of getting a loan could render you ineligible. It’s only safe to make large purchases once the homebuying process is complete and first mortgage funding has been secured.
If you’re in a lot of debt, it’s a good plan to clear as much as possible before attempting to buy a home.
Creditors are likely willing to work with you on payments since even getting some of the money they are owed is better than getting none of it.
Paying off credit debts helps you get ready for your first mortgage on two fronts.
- First, it’s the quickest way to raise your credit score
- Second, it lowers your debt to income ratio
This means not only will you be more likely to get approved for a loan, but you can snag a better interest rate too.
Decrease Credit Utilization
As you’re paying down your cards it’s good to keep in mind that those seeking a first mortgage should keep their credit utilization at no more than 30%.
What this means is on a credit limit of $500 you only want to have $150 or less charged at any given time.
Some people seek to build credit by taking out a credit card, making small purchases and paying it off each month. This is a great solution for the first-time home buyer who wants to build credit while being mindful of utilizing their limits.
Diversify Your Financing
One thing lenders want to see on a credit report is a varying number of funding sources from which you draw credit. For typical homebuyers, this means having a car loan, student loans, a credit card or a personal loan.
A history of making timely payments and paying on debts each month builds trust with the financing agency that is evaluating you for a first mortgage.
If you can diversify your financing portfolio while making responsible spending decisions this is a good way to get your credit ready for your first mortgage.
Get the Best Rates Your Credit Can Afford
Once your credit is in shape for your first mortgage, you have to shop around to get the best interest rate.
Taking your newly polished credit to any old financing institution and accepting whatever rates they throw at you is a thing of the past.
If you have a trusted local banking source you can usually seek pre-approval for a loan online.
But at the same time, you can let a handful of lenders make inquiries about your credit without damaging your score.
In doing so, you open yourself to negotiations for the best rate with your chosen lender.
Once you see what rates other lenders are willing to offer, you can make an assessment about which one is best for you.
And if one offers some perk that the other does not, don’t hesitate to ask for it. Lenders want your business.
Many first time homebuyers are leery of giving too many institutions access to their credit for fear that inquiries will tank their score, but shopping around for the best rates is an absolute must when talking about a first mortgage.
Prepare Your Credit for a First Mortgage in 2018
If you’ve been thinking about buying a house, make 2018 your year by preparing your credit for a mortgage loan.
To get the best loan options and rates you should make do the following with regards to your credit:
- Determine what kind of lending source makes the most sense for you
- Understand what lenders are looking for in terms of creditworthiness
- View your credit report and resolve any error
- Put a freeze on high dollar spending, especially if it includes financing
- Reconcile with creditors and pay down lingering debts
- Diversify your funding sources
- Compare and negotiate rates with mortgage lenders
If you’ve got the credit stuff in the bag then congratulations! You might be ready to apply for a mortgage.
Contact your chosen financial institution to take the first steps to pre-approval.
For more information on how to make your financial dreams a reality, follow the blog here.