Are You Ready to Apply for a Mortgage?
Tips for preparing your credit, avoiding scams and finding the cash you need for financing.
Before applying for a mortgage, prepare your finances and aim for a strong credit score.(Getty Images)
Just about everyone is talking about how low interest rates are right now, and whether or not rates will go lower or higher. Trying to predict where mortgage rates will go is difficult, if not impossible, but it’s clear that interest rates today are low.
As a result of the low interest rates throughout the summer, there has been a surge in the number of people considering either buying a home or refinancing an existing mortgage. In fact, as August came to a close, the National Association of Realtors reported that pending home sales in July hit their second-highest level in more than 10 years.
The Mortgage Bankers Association recently said that its mortgage purchase index is up from the year before, and over the same 12-month period, mortgage rates tracked by Freddie Mac have stayed well below 4 percent per year, to less than 3.5 percent.
But applying for a mortgage isn’t simple. Getting a lender to say yes takes more than clicking a few buttons on the internet or walking into a lender’s office with dreams of homeownership or a lower monthly payment after refinance.
To help ensure that a mortgage application is approved, consumers need to pay attention to a few things, whether they are existing homeowners looking to move, first-time homebuyers who are currently renting or existing homeowners looking to cut their monthly mortgage payment. To be successful, consumers need to be “mortgage ready” by strengthening credit, avoiding scams and ensuring there is enough cash on hand to close the deal.
Strengthen Credit, Avoid Scams
When it comes to being mortgage ready, there is nothing more important than having a strong credit profile. Perfect credit isn’t required, but a credit record that shows a lender the borrower will pay is a must.
A consumer has several choices when requesting a copy of his or her credit report. The first thing to remember is that a copy is available free of charge once each year – one place you can obtain a copy of your credit report without charge is from AnnualCreditReport.com.
The jumble of numbers on a credit report has meaning, and it’s important to know how they add up and what they mean when looking for a mortgage to purchase a home or to refinance.
Nonprofit housing counseling and credit counseling agencies can help a consumer understand a credit report. These organizations, often certified by the U.S. Department of Housing and Urban Development or by a reputable national body, like the National Foundation for Credit Counseling, will work with a consumer to understand the report and how to make it better for a small fee or at no charge.
Credit repair scams are out there, and consumers should be wary when being asked to pay up front for credit repair services, or guarantees to improve credit. The Consumer Financial Protection Bureau offers tips on identifying scams and effectively avoiding them.
Have Enough Cash to Close the Deal
If an existing homeowner is looking to refinance her mortgage, in addition to having a solid credit profile, the owner has to be in a good equity position. That is, under traditional circumstances, the home has to be worth more than is owed – this is positive equity. When the home is worth less than the mortgage owed on the property, that’s negative equity.
Real estate data company RealtyTrac reported in May that more than 6.5 million homes in the U.S. are underwater. While obtaining a new mortgage on a home with negative equity isn’t impossible, doing so affordably means using one of the federal programs that exist.
Being mortgage ready to refinance or purchase a home in nearly any situation means paying expenses related to obtaining the mortgage, commonly known as closing costs.
In this case, mortgage ready means that a consumer has the cash to cover these expenses or use a mortgage loan product that allows the expenses to be added to the mortgage amount.
But there’s another way, too. Consumers should work with a local housing counselor to identify if there are grant funds available to help pay closing cost expenses when buying a home. There are hundreds of different programs around the country for buyers with average incomes, and many of these not only help with down payment gaps, but also have money to defray closing cost expenses.
However, none of these programs will help a homeowner who is refinancing into a new mortgage.
Being mortgage ready also means being knowledgeable about different borrowing options. A housing counselor can help a borrower understand what type of loan is right for them. Choosing the right mortgage product for the situation is critical to long-term, affordable homeownership.
Finally, it’s important to remember that whether buying a home or refinancing, a lender may – and likely is – looking at a borrower’s credit profile practically up to the time a loan closes.
To protect yourself from last minute snags in the mortgage process, avoid taking on new, substantial debt that affects how much you pay out each month. Taking on new debt that could change the way a lender calculated your ability to pay – the debt to income ratio – could stop the mortgage loan from happening right up to the end.
Being mortgage ready is a process that takes time, preparation, education and spending discipline right until a consumer signs on the dotted line.