Nearly 6.5 million homes are sold every year, according to Statista. If you are looking to join the ranks of homeowners this year, and are like many home buyers, you likely will be applying for a mortgage before you find the next place to call home.
The process of applying for a mortgage usually includes the same four steps:
Step #1 - Evaluate your finances: Begin by assessing your financial situation, including your income, expenses, and credit score. This will help you determine how much you can afford to borrow and ensure you're in a good position to qualify for a mortgage.
Step #2 - Understand mortgage options: Explore various mortgage types, such as fixed-rate, adjustable-rate, or government-backed loans, along with specific terms like prepayment options. Consider the pros and cons of each option and find the best fit for your needs and financial goals.
Step #3 - Get pre-approved: Obtaining a mortgage pre-approval from a lender can mean the difference between an accepted offer and the disappointment of your dream home slipping away. This step involves providing your financial information and undergoing a preliminary credit check.
Step #4 – Find a home: After obtaining your pre-approval letter, it is time to partner with a knowledgeable real estate agent. Start looking for your dream home within your budget, obtain an appraisal, and request final mortgage approval based on the home you’ve chosen.
While the process mentioned above happens every day, there are a few additional steps you may want to take to improve your position before applying for a mortgage, such as:
Boost your credit score: A higher credit score can secure a better interest rate. Pay your bills on time, reduce existing debt, and avoid opening new lines of credit before applying for a mortgage. It may be worth waiting to making an offer until you reach a more advantageous credit score.
Save for a larger down payment: A larger down payment not only reduces your loan amount, but also improves your chances of approval. Aim to save at least 20% of the home's purchase price to avoid private mortgage insurance (PMI).
Get multiple loan estimates: Don’t limit yourself to just one mortgage option. Shop around for mortgage rates and terms from different lenders. Collecting multiple loan estimates will help you compare options and find the most favorable terms for your situation.
Organize your financial documents: This may seem like an obvious step, but many applicants waste countless days and weeks during the application process looking for financial documents, such as tax returns, bank statements, and pay stubs. Having these readily available will speed up the application process.
Securing a mortgage requires careful planning and consideration. By following the expected steps and taking a few extras into account, you'll be well-equipped to navigate the mortgage application process successfully. Remember to do your research, work on improving your credit score, and explore various loan options to find the best mortgage for your dream home. Good luck!