So you will be purchasing a Home? About to take on a Mortgage?
Start a Green File
A Green File should contain all of your important financial documents. Regardless of the loan type, lenders will need information about you. Make copies of financial statements, bank accounts, investments, credit cards, auto loans, recent pay stubs and two years of tax returns.
Check Your Credit Rating
Credit scores range between 400 and 800. 620+ is considered 'good'. 680+ is considered 'premium' and may possibly help get you a lower interest rate.
Below you will find the contact information for the 3 major credit reporting agencies to help you determine your credit rating. Ask your lender how to improve your credit score if you need to. Going forward, treat your credit like gold.
Trans Union http://www.transunion.com
Savings & Debt
If you are buying real estate, try to accumulate funds towards your down payment and closing costs (inspection, appraisal, escrow costs, title insurance, etc). Furthermore, try to pay down existing revolving and high interest rate debt like credit cards.
Toe The Line
Now is not a good time to change careers, move your money around, or buy big ticket items. Lenders like stability. So if you are considering any major changes, it pays to meet with a lender and ask them how to proceed before you make any changes! If you are tempted to buy a big ticket item, consider the following:
A $500 a month debt payment (like a credit card or auto loan) could lower the amount of home you can afford by about $83,000 (based on a 30 year mortgage at 6% interest).
Does it Help to be Pre-Qualified by a Lender?
The pre-qualification process can be completed fairly quickly, based on less information than is required for getting pre-approved. While it is fast and it does help, a pre-qualification letter is an opinion from a lender of the maximum amount of real estate you can qualify for. In a competitive seller’s market, an offer from a buyer with a pre-qualification letter could lose out to a person who is pre-approved.
Get Pre-Approved by a Lender
There are several benefits to going the extra mile and getting a pre-approval letter. First of all, you will know exactly how much real estate you can afford. When you find a property you want to buy, your offer will be in a better positioned than someone less prepared. Finally, being pre-approved is more efficient; it reduces the amount of time it will take your lender to fund your loan. Be prepared to provide comprehensive documentation, which the lender may independently verify, including but not limited to:
Job and career status
Monthly debt payments
Total assets and debts
Credit Report (Typically, it costs under $50 to check your credit. With your permission the lender will order a review of your outstanding loans and your repayment history from a third party credit agency.)
What is APR?
The APR, or annual percentage rate, is the sum total of all your borrowing costs expressed as a percentage interest rate charged on the loan balance. For example: After fees, the original interest rate quote of 5.875% might work out to a 6% APR loan, where the interest costs about $6,000 per year for every $100,000 borrowed, and the principal payments are calculated based on the length of the loan term (for example 15, 20, or 30 years).
The interest rates on variable loans readjust periodically based on changes in an index. Typical indexes include the Federal Funds Rate, Treasury Bill.
When mortgage companies are competing by offering lower interest rates, they may charge you a one-time pre-paid interest payment calculated as a percentage of the loan. Called points", this may range from 0.25% to 2% of the loan balance, and is usually paid up front. Points are tax-deductible; consult with your tax advisor.
Lenders hire experienced, often independent appraisers to evaluate the property’s purchase price, condition and size compared to similar recent neighborhood sales. This helps ensure the purchase price is not too high, and gives the lender more confidence in getting repaid in the event they are forced to sell the property if the borrower defaults. The appraisal costs vary depending on the property, type of appraisal, and region.