May 3, 2021Steps to Take Before Applying for a Mortgage
Buying a home is an exciting achievement, but it’s also a huge investment. Before you begin the home-buying process, you need to know what lenders will look for to approve your home loan. You should also get a sense of what the upfront home-buying costs will be. Here are some ways to make sure you’re ready to buy your dream home.
Check Your Credit Score.
Check your credit score so you’ll know where your creditworthiness stands. Most lenders would consider a credit score that’s 750 or higher very good. Still, even if your credit score isn’t that high, it doesn’t mean lenders won’t approve you for a home loan. But it’s still in your best interest to improve your score before applying for preapproval. A good credit score might save you thousands of dollars in interest over time. Here’s a list of things to do before applying for a home loan:
- Visit www.AnnualCreditReport.com to get a copy of your credit report and check for errors. Correcting all errors can boost your score quickly.
- Don’t apply for other types of debt. Credit and loan applications often ding your credit score in the short-term. Therefore, you should avoid any new activity involving hard inquiries, which could harm your credit score. Limit large purchases as well, especially if you use a line of credit to pay for them.
- Pay off unsecured debt. Secured debt, like home and auto loans, have collateral; but unsecured debt, like credit card balances and personal loans, do not have any collateral attached to them and are considered risky. Taking on more unsecured debt will make lenders see you as a higher risk borrower.
- Lower your credit utilization ratio. Your credit utilization ratio (CUR) is the amount of available credit you currently use. For example, if you have a $10,000 limit on a credit card, but your current balance is $7,500, you will have a 75% CUR. Lenders prefer this ratio to be under 25%.
- Pay all your bills on time. Payment history makes up most of your credit score. Overdue payments, particularly recent ones, will significantly lower your credit score. Therefore, it’s important that you pay all your bills on time. You might even want to automate your payments so you don’t accidentally miss one. You can also set up email or text alerts to remind you when your bills are due.
Estimate Your Closing Costs.
Many buyers are surprised by how high the closing costs are to buy their home. Closing costs will be around 2% to 5% of the home’s purchase price. Therefore, if you’re buying a $200,000 house, you’d estimate the closing costs to be between $4,000 and $10,000. You will need this amount upfront before you can close on your home loan. One of our home loan experts can give you a rough estimate when you reach out for preapproval.
Estimate Your Down Payment.
If you’re looking to avoid PMI (private mortgage insurance), you’ll need a conventional home loan, which will require a down payment of around 20%. For example, if you buy a $200,000 home with a conventional loan, the down payment would be $40,000. You need the down payment before you close the home loan. If you can’t put 20% down, the lender will likely require your loan to carry PMI. Alternatively, there could be special loan programs you can explore.
We’re Here to Help!
Buying a home is a big investment–and preparing financially for the closing date is just as important as finding the home of your dreams. Our home loan experts are here to guide you through the entire process and answer all your questions. For more information on the steps to take before applying for a mortgage, stop by any of our convenient branch locations or call us at 800–226–6673.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.