How To Get Approved For a Mortgage (at the best rate possible)
The first step in purchasing a home is getting pre-approved. Getting pre-approved before you start shopping will give you insight on what you can afford, what kind of home you can purchase and what area you should be looking.
If you’ve been keeping an eye on the real estate market the last couple years, you’ve probably noticed it is constantly changing. In most cases you will want to make sure you are pre-approved prior to looking at homes, especially if you are searching during a hot market. In this article, I am going to break down three factors in getting approved for a mortgage:
Tips For Getting Pre-Approved For A Mortgage
Tips For Getting Approved For A Mortgage
Tips For Getting The Best Rate On Your Mortgage
Tips for getting pre-approved:
Work with a local lender.
I always recommend a local lender over banks and online lenders. Local loan officers will be there for you when you need them (including the weekend) and work hard to ensure their clients have the best experience possible. Working with a local lender that is familiar with the area, programs and tools to serve you best will make your home purchase easier.
Make sure you can provide two years of consistent employment.
There are exceptions to this rule, but most lenders will need to see two years of employment prior to giving a pre-approval, ideally in the same field.
Check your credit score and credit history.
The lowest credit score you can have before getting pre-approved for a mortgage is 580. Keeping an eye on your score and making improvements can save you money on your mortgage. Make sure you dispute and discrepancies prior to speaking to a lender.
Avoid making any large withdrawals or undocumented deposits.
This may not come up during the pre-approval process but it absolutely will when you apply for a loan. Lenders want everything to be documented and large depsoits or withdrawals could have a negative impact on your approval.
Gather all necessary documents.
You will need the following documents for your pre-approval and loan process: your social security number, current address, employment history, bank statements, two years worth of tax documents (W-2/1099).
Pre-approvals are generally good for 60-90 days, after that you will need to get an updated pre-approval. It is important that you are transparent and honest with your loan officer during the pre-approval process because any changes could result in your loan being denied (and you losing money).
Tips for getting approved:
Do not quit or change your job prior to speaking to your loan officer.
Do not apply or co-sign for any loans or credit cards.
Do not make any large deposits into your bank account without documentation.
Keep track of all payments you receive through Paypal and similar services - you will most likely need to document what these were for to your lender.
Do not withdraw large sums of money from your bank account.
Make sure all your payments are made on time.
Doing anything that could impact your credit, debt to income ratio or personal finances can negatively impact your approval.
We all know your interest rate makes a difference in your monthly payment - but how much?
Interest is the cost of borrowing money and is constantly changing.
Market mortgage rates are influenced by:
Inflation
The Economy
The Federal Reserve
Interest rates strongly impact the real estate market. When interest rates are low, your buying power will increase. In real estate, this is what we call the 1 in ten rule; a 1% change in interest rate will change your payment by about 10%.
Let's look at an example using a $250,000 mortgage payment (0% down, 30 year fixed rate):
4.5% - Payment: $1,267
5.5% - Payment: $1,419
6.5% - Payment: $1,580
7.5 - Payment: $1,748
As you can see, your interest rate will make a big difference in your payment. There isn't much we can do as individuals to impact the market rate but there are things you can do to impact your individual rate. Your individual rate is determined by your credit score, loan terms, LTV ratio, down payment and mortgage points.
How to improve your interest rate:
Credit Score - generally a score of 740+ will ensure the best rates.
Loan Terms - typically, shorter loan periods will get you a better rate but I do not always recommend this.
Loan to Value Ratio - the lower your loan to value ratio, the better your rate.
Down Payment - increasing your down payment can positively impact your score.
Mortgage Points Purchased - mortgage points are discount points paid at closing to lower your interest rate.
Over the passed year, we are seeing loan products referred to as "Rate Reducer" and "2-1 Buydown" emerge as well. These programs allow you, or the seller to buy down your rate for up to two years.