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Applying for a mortgage for the first time can be nerve-wracking. From having to provide piles of financial documentation to hearing terms you may be unfamiliar with (what the heck is a debt-to-income ratio anyway?), it's easy to get overwhelmed as a new home loan candidate. If you're in that boat, here are a few tips to help you along.
1. Have a strong credit score
Your credit score could spell the difference between getting approved for a mortgage and getting denied. That number speaks to how you use credit and how consistently you pay certain debts. So it makes sense that lenders would take your score under strong consideration.
You'll need a minimum credit score of 620 to qualify for a conventional mortgage. But some lenders have higher requirements. And if you want to snag the lowest mortgage rate a given lender has to offer, you'll generally need a score in the mid- to upper-700s or higher.
Some first-time mortgage applicants make the mistake of trying to get a home loan before checking their credit scores. A better bet is to get a hold of your score to know whether you're in a good position to apply or not.
2. Pay off some existing debt
Okay, so it's time to talk about that debt-to-income ratio. It's a formula that measures your existing debt relative to your income, and if it's too high, it'll lead mortgage lenders to believe that you can't handle a home loan payment every month.
If you're carrying a lot of debt, paying off a chunk of it before applying for a mortgage could increase your chances of success. And if you have different types of debt, focus on your credit card balances first. Lowering those could actually help your credit score improve, too.
3. Boost your cash reserves for a down payment
Bringing more money to the table in the form of a down payment will often help you borrow less to buy a home. But some lenders require a larger down payment than others, so the more you can save, the better.
In fact, your goal should be to put down 20% of your home's purchase price at closing if you're taking out a conventional loan. If you don't, you may still get approved for a mortgage, but you'll also be hit with private mortgage insurance, or PMI. This is a costly premium that gets tacked on to your monthly payments and makes owning your home more expensive.
4. Know how big of a mortgage you can afford
Though lenders today aren't exactly in the habit of giving out loans without vetting applicants' finances, the loan amount you qualify for may not be the amount you're comfortable paying each month. Say you can get approved for a mortgage that would leave you with a monthly payment of $1,200. If you feel you can't swing more than $1,000 a month, then you shouldn't exceed that threshold.
Before you apply for a home loan, use a mortgage calculator to see how much you're OK with borrowing. And then stick to that number, even if you're tempted with a higher loan offer.
5. Shop around with multiple lenders
Mortgage lenders don't always offer borrowers the same terms. It may be that one lender is willing to offer you a better interest rate than another on a home loan. Or perhaps two lenders offer you the same rate, but one charges lower closing costs to finalize your loan.
That's why it's a good idea to shop around for a mortgage rather than move forward with the first lender that approves your application. Doing your research could result in some nice savings.
Applying for a mortgage for the first time can be stressful, but the more prepared you are, the easier the process is apt to be. Remember, too, that if there's something about the process you don't understand, don't hesitate to ask for clarification. When you're borrowing a large sum of money, it's important to know exactly what you're signing up for, so don't be shy about seeking out more details along the way.
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