Applying for a mortgage? A lot goes into buying a home, and you want to get the best rate possible on your mortgage.
These 5 small steps can make a big difference when it comes to financing your home. They can help you get a lower mortgage rate and possibly a better house.
1. Check Your Credit Report
When it comes to applying for a mortgage, low credit isn’t good news, but that can be fixed! With a low credit score, you’ll end up with a higher interest rate on your mortgage. At Del Rey Urban, we go above and beyond for our clients and will help you build a customized plan to build a better credit score. If you don’t have a good score now reach us so we can help.
Both qualifying for a mortgage and mortgage rates depend on credit, so you should check your credit score at least one year before planning on buying a house. If you check your credit score and it’s lower than you expected, you’ll still have the time you need to raise your credit score before applying for a mortgage.
Even if you already have good credit, you’ll benefit from checking your score early. Mortgage rates are based on credit tiers, with higher credit tiers leading to lower mortgage rates. Sometimes only a few points stand between you and a higher credit tier, and taking the time to raise your credit score just a little can mean a lower mortgage rate.
How can I raise my credit score?
If you want to raise your credit score before applying for a mortgage, do these 3 things right away:
1. Don’t open or close any credit accounts before closing.
2. Pay all of your bills on time.
3. If any of your credit card balances are above 30% of your credit limit, reduce that balance to as low as possible. A balance above 30% of your credit limit will actively hurt your credit score.
Where do you check your credit score, and what should you check for?
Based on federal law, you are legally entitled to free copies of your credit report every 12 months at annualcreditreport.com.
Your credit report is important because it contains all of the documents through which your credit score is calculated. However, sometimes these documents contain errors that can affect your credit score. In fact, according to the Director of the Center on Regulation and Markets, “More than one in five consumers have a “potentially material error” in their credit file that makes them look riskier than they are.”
Take the time to thoroughly read your credit report and look for errors. If you do find errors, you can dispute them. For advice on disputing errors, reference this article from the Consumer Financial Protection Bureau.
2. Apply with Multiple Lenders
Most first-time home buyers don’t know it, but lenders have a good amount of flexibility when it comes to the rates and fees they offer you.
So, it’s a bad idea to accept the first quote a lender gives you. Instead, shop around with multiple lenders. It can be hard to recognize a good quote if you don’t have anything to compare it to. So, getting at least 3 quotes from different lenders, if not more.
Getting multiple quotes will give you a good idea of whether or not a quote is a good deal for you. Also, you can use lower rates from one lender to bargain with another lender. To compare mortgage rates easily, you can use sites like consumersadvocate.org
3. Get Pre-Approved
Without knowing what you are approved for, you don’t really know your budget. So, if you start looking for a new home before getting pre-approved, you could end up falling in love with a house that you can’t really afford.
Get pre-approved before you start seriously looking at houses so that you have a good idea of your price range. Even if you think you might have a good idea of what you’ll be able to afford, you can’t really know how your credit and other factors will affect your mortgage rate before you are approved.
Besides giving you a budget to work inside of before you start looking at houses, getting pre-approved gives you credibility and leverage when you make an offer on a house. Home sellers and their real estate agents are far more likely to take an offer seriously if it comes from someone with a pre-approval letter. On the flip side, they are also more likely to ignore an unsupported offer.
Looking for a lender to help you get pre-approved? We will email you a list of the top lenders in our network!
4. Avoid Late Rent
Late rent is always bad, even when the only repercussion is late fees from your landlord. Late rent is even worse if you’re looking to apply for a mortgage. It can even bar you from getting any mortgage at all.
For lenders, rent payment is used as an indicator of how someone will make their mortgage payments. Paying rent is very similar to paying a mortgage, and if you have a lot of late rent payments, or worse, if you have missed payments, lenders will see you as a risky investment. If you make late payments on your rent, lenders will assume you’ll also make late payments on your mortgage.
Avoiding late rent payments is especially important for people with little other credit history. If you’ve never had a credit card, car payments, or other types of loans, your rent payment history is the main way that your credit-worthiness will be determined.
5. Avoid Financing Expensive Items
We encourage people to avoid financing expensive items because mortgage applications depend on your DTI (debt-to-income ratio). Your DTI is determined by the amount of money you pay in monthly debts compared to your total income.
If you make payments on large items like expensive cars, you can still get a mortgage. But if you make less payments every month by avoiding expensive items with large monthly payments, you can get approved for a mortgage that’s tens of thousands of dollars more!
Keep in mind, we only recommend this to make your financing process as easy as possible for your dream home.
What about smaller items on my credit card?
If you can, the best practice is to avoid shorter-term credit purchases too before closing. Lenders routinely look at your credit score before closing, and if you lower your credit score, they can re-open your mortgage offer.