Ok, it’s time to take a deep breath and go borrow an outrageous sum of money. You’ll find that the process is not nearly so intimidating as it looks if you’re prepared.
Credit
There are three things you should do about your credit. The first is to take a look at what the three credit ratings agencies have on file about you. Do this early in the process, as it takes time to get errors and retired debts removed from credit reports. The rough estimate is that forty percent of all credit reports contain errors, and it’s guaranteed that the three are never identical. So get them up to date and know what they contain so you can discuss it.
Retire as much outstanding short term credit and low-balance debt as you can. The less debt you have on the books, the more you can borrow on the mortgage. And finally, don’t take out any new credit cards or short-term loans just before walking into the mortgage broker’s office.
Down Payment
Do state the obvious: the more you can gather for a down payment the better off you are. This applies not only to your monthly mortgage payment, but may also apply to the question of whether you are eligible for a loan or not. If your credit is less than perfect and you’re a borderline case, a healthy down payment may be the difference between acceptance or rejection of your mortgage application.
The other factor in play with a down payment is mortgage insurance. If your down payment is less than 20% of the price of the home, you’ll be required to buy mortgage insurance to protect your lender if you default on the loan. Mortgage insurance can run as much as $100 per month. Some people take out the calculator and decide that it’s more economical to take a mortgage at 80% of the home’s value, scrape together a ten percent down payment and borrow the other ten percent on another loan. It may net out to be cheaper paying on the two loans than paying a bigger mortgage plus the insurance.
Salary and Savings
There’s going to be a considerable cash outlay in order to secure your mortgage. The lender will want points and there will be substantial closing costs. Don’t go after a mortgage with a bank account that’s empty after the down payment.
You should also figure out what you can afford to pay on a mortgage – what the ration of house payment to total income is, how the tax on the interest will impact you, etc. Actually, you should have done this math while you were looking for a home. But the lender is going to look closely at the ration of income to house payment, so acquaint yourself with the limits and shop accordingly.
Interest Rates
There are more “deals” out there on mortgages than you can hope to understand. Take a couple of things into consideration. The first is, if you are going through this at a time of very low mortgage rates, it might be worth paying the fee to “lock in” at the available low rate so that it’s available when your mortgage closes. The other thing to ask yourself is how long you intend to stay in the house. If it’s five years or less, consider an adjustable rate mortgage or one of the many variations that start you out at a low rate.
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