If you apply for a mortgage in the right way, your home buying process gets off to a flying start.
By following these simple steps you stand to get a lower mortgage rate and perhaps a better house:
- Check your credit report for errors and raise your score if possible
- Apply with multiple lenders to find the lowest rate and fees
- Get pre-approved for a mortgage before making an offer
- Avoid late rent payments; these can affect your mortgage eligibility
- Avoid financing expensive items before closing, which can reduce your home buying budget
Check your credit before you apply
If you’re waiting until you apply for a mortgage to check your credit, you’re waiting too long.
That’s because mortgage rates — and mortgage qualification — depend on your credit. And the stakes are pretty high.
- Start checking your credit score at least a year before you plan to buy a house. Low credit could mean high rates or not qualifying
- Even if your credit is strong, working to improve it could get you a better mortgage rate and lower payments
If you check your credit at the time you apply and find out it’s lower than you thought, you’ll likely end up with a higher rate and more expensive monthly payment than you were hoping for.
If you find out your credit score is really low — think, below 580 — you might not qualify for a mortgage at all. You’ll likely be out of the home buying game for another year or more as you work to boost your score back up.
A small change in credit score can make a big difference
There’s a flip side to this story, too. A higher credit score usually means a lower mortgage rate. So if you check your score and learn that it’s strong, you might still want to work on improving it before you buy.
Consider this: Mortgage rates are based on credit “tiers.” A higher credit tier means a cheaper mortgage. And if your credit score is currently 719, raising it just one point could put you in a higher tier and earn you a lower rate.
Check your credit early and be thorough
Ideally, you should start checking your credit early. It can easily take 12 months or more to reverse serious credit issues — so the sooner you get started, the better.
You’re legally entitled to free copies of your credit reports each year through annualcreditreport.com. These reports are vitally important because they’re the source documents on which your credit score is calculated.
Yet one study found that as many in one in five reports contain errors that are serious enough to affect a consumer’s creditworthiness.
So you need to crawl yours, making sure they’re 100% accurate. Federal regulator the Consumer Financial Protection Bureau has useful advice for disputing errors.
Raise your credit score before you apply for a mortgage if possible
If your reports are accurate but your score is lower than it could be, work on it. There are three things you can do immediately:
- Keep paying every single bill on time
- Reduce your credit card balances — If they’re above 30% of your credit limits, you’re actively hurting your score. The lower the better
- Don’t open or close credit accounts — Wait until after closing
Those three action points should help your score over time.
Apply for a mortgage with multiple lenders
It’s a huge mistake to accept the first mortgage quote you get.
Many first-time home buyers don’t know it, but mortgage rates aren’t set in stone. Lenders actually have a lot of flexibility with the rate and fees they offer you.
That means a lender you’re looking at might be able to offer a lower rate than the one they’re showing you.
Shop around for your best rate and closing costs
In order to get those lower rates, you have to shop around and get a few different quotes. If you get a lower rate quote from one lender, you can use it as a bargaining chip to talk other lenders down.
Shopping around for mortgage rates also lets you know if you’re getting a good deal.
For example, a 4% rate and $3,000 in fees might sound all right if it’s the first quote you’ve gotten. But another lender might be able to offer you 3.75% and $2,500 in fees.
That makes the first offer a lot less appealing — but you won’t know it until you look around.
Get at least three quotes
Compare personalized rate quotes from at least three lenders (but more’s fine) to make sure you’re getting the best deal.
And make sure you’re comparing apples-to-apples quotes. Things like discount points can make one offer look artificially more appealing than another if you’re not watching out.
Get pre-approved before you make an offer on a home
This is arguably the biggest mistake you can make when you’re trying to buy a house: Applying for a mortgage too late and not getting pre-approved before you begin searching for your next home.
How late is too late to start the pre-approval process? If you’re already seriously looking at homes, you’ve waited too long.
Know what you can afford
You really don’t know what you can afford until you’ve been officially pre-approved by a mortgage lender. They’ll look at your full financial portfolio — income, credit, debts, assets — and determine your exact home buying budget.
Even if you think you know what you can afford, you might be surprised.
As we described above, debts can take down your home buying power by a startling amount. And you can’t be sure how things like credit will affect your budget until a lender tells you.
By not getting pre-approved for a mortgage before you start shopping, you run the risk of falling in love with a house only to find out you can’t afford it.
(to get an idea of what you can afford, before connecting with a lender, check out our Mortgage Affordability Calculator)
A pre-approval letter gives you leverage
Worse, you might find yourself negotiating for your perfect home and being ignored. Imagine you’re a home seller (or a seller’s real estate agent) and you get an unsupported offer from a total stranger.
For all you know, the prospective buyer stands zero chance of getting the financing they need.
And if you get another offer from someone who has a pre-approval letter in her purse, you’re bound to take that one more seriously. Heck, you might even accept a lower price from the one you know can proceed.
So getting pre-approved gives you credibility and leverage in negotiations. And those are two things every homebuyer needs.
Late rent payments can make it harder to qualify for a mortgage
Being late on rent is a bigger deal than you might think — and not just because it’ll land you with a late fee from your landlord.
Late rent payments can actually bar you from getting a mortgage.
It makes sense when you think about it. Rent is a large sum of money you pay each month for housing. So is a mortgage.
If you have a spotty history with rent checks, why should a lender believe you’ll make your mortgage payments on time?
When you apply for a mortgage, the lender will check your rent history over the past year or two.
If you’ve been late on payments, or worse, missed them, there’s a chance you’ll be written off as a risky investment.
Rent is especially important for people without an extensive credit history.
If you haven’t been responsible for things like credit card, loan or car payments, rent will be the No. 1 indicator of your credit-worthiness.
Credit purchases can limit your home buying budget
You may have heard that you shouldn’t finance an expensive item while applying for a mortgage.
But most people don’t know that it’s a mistake to buy something with big payments even years before you apply.
That’s because mortgage applications depend on your “debt-to-income ratio” (DTI ) — meaning the amount you pay in monthly debts compared to your total income.
The more you owe each month for items like car payments and loans, the less you have left over each month for mortgage payments. This can seriously limit the size of the mortgage you’re able to qualify for.
How a big purchase affects your mortgage application
For example, take a scenario with two different buyers — they earn equal income, but one has a large car payment and the other doesn’t.
|Buyer 1||Buyer 2|
|Qualified mortgage amount||$300,000||$390,000|
In this scenario, both buyers qualify for a 36% debt-to-income ratio. But for Buyer 1, much of that monthly allowance is taken up by a $500 monthly car payment.
As a result, Buyer 1 has less wiggle room for a mortgage payment and ends up qualifying for a home loan worth almost $100,000 less.
That’s a big deal. $100,000 can be the difference between buying a house you really want (something nice, updated, in a great location) and having to settle for a just-okay house — maybe one that needs some work or isn’t in the location you wanted.
So if home buying is in your future, examine your priorities. Consider a car with inexpensive payments or one you can pay off quickly.
And try to avoid making other big-ticket purchases that could compromise your home buying power.
Watch out for credit card balances, too
Perhaps that advice has come too late. Maybe you’re already locked into loans that have years to run.
But you can still look out for shorter-term credit purchases. Try to avoid financing anything before closing, if you can.
Of course, it’s tempting. You’re going to need a ton of stuff for your new home — and you might want to start stocking up on furniture, decorations, etc.
But lenders nowadays routinely pull your credit score in the days leading up to closing. And any new account you open or any significant purchase you make on your plastic could drag that score down enough to re-open your mortgage offer.
It may only be enough to increase your mortgage rate a little. But in extreme circumstances, it could see your whole approval pulled.
So avoid making those purchases until after you close. If it helps, imagine the shopping spree you can go on the moment you’ve closed.