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as of 04/19/19
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How to Know When You’re Mortgage Ready

Ready for a mortgage

If you are interested in buying a home, you’ve likely been planning to get approved for a mortgage either actively or passively. You may be monitoring credit scores, debt-to-income ratios, and savings for a down payment, as well as learning about the housing market. But how do you know when you’re really ready to apply for pre-approval? Use this guide to help you assess if you are ready to turn planning into purchasing.

Learn which mortgage is right for you

Your preparation for a mortgage loan will depend on the type of mortgage that you want. For homebuyers who have a smaller down payment, an FHA Loan may be the best option. However, if you have excellent credit and a considerable savings, you may want to look into conventional mortgage loans.

FHA Loans require:

• A down payment of 3.5%

• A credit score of 620+

Learn more about FHA loans.

Conventional Loans require:

• A down payment of 5-20% down (avoids mortgage insurance)

• A credit score of 640+ is desirable (a higher score will provide for  a lower interest rate)

Learn more about conventional loans.

As a part of your preparation, choose which type of mortgage loan fits your situation best. Remember that each mortgage lender may have unique requirements for different types of loans.

When is a down payment ready?

Determining how much you need for a down payment is dependent on a few factors–the type of loan, desired interest rate, preference with regard to mortgage insurance, and actual purchase price of the home.

For an FHA Loan, the down payment requirement is 3.5%, but you will have to pay mortgage insurance for the life of the loan. For a conventional loan, a down payment is typically 5-20%, but you can pay more to avoid mortgage insurance and to reduce your interest rate.

When you are preparing to buy a home, it’s important to focus savings into a down payment. If you have a smaller savings amount, you may want to choose an FHA Loan. Remember, regardless of which loan type you choose, you can pay a larger amount than required to avoid mortgage insurance (conventional loans), influence a lower interest rate, or to put more equity in your home.

Learn more about down payments.

Preparing your credit score

Your credit score has a large impact on the type of mortgage you can choose from. It will also impact your interest rate, monthly payments, and down payment amount.

For an FHA loan, a credit score of 620 or higher is desirable. If your credit score is significantly higher, you may be able to receive a lower interest rate and still benefit from the FHA Loan down payment requirement.

For a conventional mortgage, lenders will have flexibility with the credit score that they find desirable, but it is usually 640  or higher. A higher credit score can allow for lower interest rates.

The higher your credit score, the better interest rate you’ll get no matter the type of loan. You can improve your credit score by doing these things:

  • Pay off debt
  • Keep your credit usage lower than 50% of credit limit on each account
  • Avoid opening too many lines of credit
  • Pay credit bills on time

Learn your debt to income ratio

Your debt to income ratio is the amount of debt that you owe and make payments on in ratio to your earned income. Mortgage lenders will look at debt to income ratio based on a monthly cycle. You can understand your ratio by dividing your monthly debt expenses by your monthly income:

Total Monthly debt expenses ÷ monthly income = debt to income ratio

Most lenders will consider a borrower desirable if their debt to income ratio is less than 43%, thought an FHA lender may allow as high as 55%. You can improve your debt to income ratio by paying off credit, consolidating lines of credit, paying over the lowest payment required on debt, and, of course, increasing your income.

Getting ready for closing costs

Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. The amount can be between 2-5% of the price of your home. Closing costs can be a large expense for a borrower if they are not prepared for them. However, putting savings aside can help you to prepare for this payment. Closing costs may be paid by the buyer, seller, or the lender.

Closing costs can be unique to each home purchase, but they will likely include appraisal and attorney fees, title insurance and services, as well as local and state taxes and recording fees. You can ask your mortgage lender to provide you with a closing disclosure that will inform you of the amount to be paid in closing costs.

Learn more about closing costs.

Create a goal

It’s important to set a goal as you prepare to buy a home. Include a realistic purchase price, the interest rate you want, and the amount you are prepared to pay in down payment.

Set a personal goal as well. Include where you can save money, how you can help your credit, and what you can do to reduce debt.

When you start shopping for mortgages, know that you’ve prepared everything to the best of your ability, and find a mortgage lender that meets your needs. Bring all of your questions to your lender, and be prepared to share your goals and how you have planned to make your best home purchase. It will always pay off!

Find out more about your mortgage options by contacting RatePro Mortgage!


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