Top Mortgage Preparation Tips & Tricks
One of the most important steps in the home buying process is the mortgage phase. Many buyers don’t realize why it’s important to get pre-approved for a mortgage when buying a home.
Getting a mortgage is something that buyers need to prepare for. It’s something that should be thought about well before deciding to walk into a bank or mortgage lender to get approved.
When preparing to get a mortgage there are certain tips and tricks that should be followed. The tips for preparing to get a mortgage do not apply to every buyer because of varying circumstances.
Below are some of the top tips to be aware of when preparing to get a mortgage. By following the below tips you’ll have a much better understanding of how you should be getting prepared to get a mortgage which should make getting the process started as stress free as possible.
Make On-Time Payments
One of the top tips for preparing to get a mortgage is to make sure you’re making on-time payments. This may seem very silly to be discussing, but the number of potential buyers who are planning to purchase a home and aren’t paying their bills is staggering.
There are many bills that you need to make sure you’re staying current with as you prepare to get a mortgage. Remember to continue to pay your credit cards, car loans, student loans, utilities, rent, and current mortgage on time.
All of these bills can have a major impact on your ability to get a mortgage. One of the most common bill that is not paid on time by potential borrowers, especially millennials, are student loans. The impact that student loans have on getting a mortgage is enormous and paying them on time is crucial, like all bills.
Review Credit Lines
One of the most important mortgage overlays, also commonly referred to as mortgage guidelines, are the number of trade lines that a potential borrower has. A trade line is a fancy word for account. As you’re preparing to get a mortgage, you need to review the trade lines that you have.
Most lenders will require that a borrower has at least 4 trade lines open when getting a mortgage. In order for a trade line to be considered and show up on a credit report when getting a mortgage, they must be actively paid off for 12 months.
If you do not have 4 trade lines open a mortgage lender may allow alternative credit references such as cancelled rent checks or a letter from your auto insurance company, utility company, cell phone carrier, or other obligatory accounts. It’s important that as you pay your bills that you document the payments. For example, if you’re paying rent, make sure you’re paying with a check so that you have documentation showing consistent, on-time payments.
If you don’t have enough established accounts or trade lines, it’s suggested that you open a secured credit card with a small maximum credit limit such as $500.00. On this credit card you should only maintain a balance of $20-$30 and ensure you’re paying the full balance in full each month, on-time. If you continue to pay off this small monthly bill, you’ll eventually establish another trade line to use towards getting approved for a mortgage.
Monitor Credit Balances & Scores
A very common reasons why mortgages are denied after a pre-approval is because a buyer decides to run up the balances on their trade lines. It’s important as you’re preparing to get a mortgage to buy a home that you monitor your credit balances.
It is a very bad idea to max out your credit cards and other lines of credit. The higher the balances are, the lower your credit score will be. The impact that credit scores have on getting a mortgage is big. If you have a low credit score because you have large credit balances, you’ll have a higher mortgage interest rate which can cost you thousands of dollars over the life of the mortgage.
Pay Off Any Collections
One mortgage FAQ that is frequently asked is whether or not to pay off any collections when getting a mortgage. It’s extremely important that before you apply for a mortgage that you pay off any collections. A collection on a credit report can be devastating. As you’re preparing to get a mortgage, make sure that you review your credit report and ensure you don’t have any collections.
It’s not impossible that a lender won’t approve a mortgage with a collection, but the chances are much less. As you pay off collections, it’s vital that you receive the proper documentation that proves the collection has been settled, even if it’s for less. This may include keeping a copy of the check that was used to payoff the collection or copies of any correspondence from the payoff.
A critical variable that is used when getting approved for a mortgage is a potential borrowers debt to income ratio. Depending on the type of financing a potential borrower is looking to secure will determine how much debt they can have in relation to their income.
As you’re starting to think about what type of mortgage is best, you need to keep in mind what your debts are. Another great tip as you’re preparing to get a mortgage is to reduce your debts as much as possible. The lower your monthly debts, the greater the amount a mortgage lender will allow you to borrow.
Be Cautious Opening New Accounts
While preparing to get a mortgage, do not open up any new accounts unless absolutely necessary. Opening a new credit account typically requires a hard credit inquiry to be completed. A hard credit inquiry can impact your credit score and potentially make your credit score lower than what is required by a mortgage lender.
An important thing to keep in mind is that if you decide to co-sign for someone, you’re not only likely adding a hard credit inquiry to your credit report but also adding additional debt.
Recently while selling a home in Irondequoit NY, the buyer who was approved for their mortgage co-signed for a car for a relative. When the final review of their credit was completed, their score not only dropped significantly but also their debt to income ratio was higher than what was allowed. This unfortunately resulted in the buyer being declined and was the reason the real estate deal fell through.
Start Saving Money
One of the most important things to keep in mind as you’re preparing to get a mortgage is that you’ll need money to cover some of the costs of buying a home. The costs of buying a home include real estate taxes, underwriting fees, down payment, and homeowners insurance.
Saving money is important whether you’re looking to make the minimum down payment or whether you’re looking to make a large 20% down payment in as a way to eliminate private mortgage insurance. Below are five tried and true tips that can help you save money as you prepare to get a mortgage.
- Create a monthly budget – A great way to save money is to create a monthly budget. In order to save money you must make more money than you spend. Creating a monthly budget is a great way to review what you’re monthly bills are and identify which bills you may be able to reduce or eliminate.
- Create a separate home buying fund – As you’re preparing to get a mortgage and are attempting to save money, one of the biggest reasons why buyers aren’t able to save money is because they don’t have an account setup for their home purchase. Whether you’re a first time buyer or buying your fifth home, opening a separate account designated solely for your home purchase is a great way to save money.
- Work more – If possible, a great way to save money is to work more hours. If your job allows you overtime or bonuses, working more hours is a great way to make additional income that can be saved in anticipation of getting a mortgage.
- Make savings automatic – One reason why many buyers fail to save money to buy a home is because they don’t have a system in place to save money. A great way to save money is to automate your savings and have a set amount of money sent to your savings account from every paycheck. This eliminates the chances you’re tempted to spend the money you should be saving.
- Reduce your retirement savings – It’s extremely important to plan for the future, however, as you’re preparing to get a mortgage a great way to save money is to reduce the amount you’re putting aside for retirement.
By following the above 5 tips for saving money you’ll have a solid amount of money set aside for your home purchase. Whether you’re attempting to buy a home with little or no money or looking to put a substantial amount of money down, it’s important to save money as you’re preparing to get a mortgage.
As you’re preparing to get a mortgage to buy a home, it’s critical that you know what you should be doing. It’s far too common that buyers do not prepare themselves to get a mortgage and when they attempt to apply, they are not pleased with the outcome.
By following the above tips for preparing to get a mortgage you’ll greatly improve the chances that you get the pre-approval amount that you desire as well as the top mortgage interest rate.
Other Top Resources For Mortgages & Home Buying
- First Time Home Buyer Tips & Advice
- 20 Mortgage Terms To Be Aware Of via Paul Sian
- How To Get The Best Deal On A Mortgage via HiscockHomes.com
Are you preparing to get a mortgage in Rochester, NY in order to buy a home? If so, the above information will help you be prepared for the mortgage process. If you’re looking for a top mortgage company in Rochester, contact me, and I’d be happy to recommend a few of the best companies in the area. Having a top local mortgage company and a top local real estate agent is vital to the success in your home buying endeavor.
About the authors: The above article “Tips For Preparing To Get A Mortgage When Buying A Home” was provided by the Keith Hiscock Sold Team (Keith & Kyle Hiscock). With over 30 years combined experience, if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.
We service the following Greater Rochester NY areas: Irondequoit, Webster, Penfield, Pittsford, Fairport, Brighton, Greece, Gates, Hilton, Brockport, Mendon, Henrietta, Perinton, Churchville, Scottsville, East Rochester, Rush, Honeoye Falls, Chili, and Victor NY.
© 2016, Kyle Hiscock. All rights reserved.