Look at your budget
Take a good, long, hard look at your budget and decide how much of a house payment you can really afford. When you’re deciding if you’re ready to apply for a mortgage, this is absolutely critical. Don’t rely on online calculators or other methods to tell you what they think you can comfortably afford each month. Instead, examine your budget and all of your costs on your own to come up with a number you really feel at ease with.
Do not attempt to finagle or increase that number by convincing yourself that you’ll have more money available to you later. If you’re going so far as to say things like, “well, if I cut the cable bill…” or “If we just start buying generic groceries…”, you’re considering a payment that is too high. Remember: you will never be OK with having a payment that is too high for your income—but you’ll never feel your mortgage payment is too low, regardless of your income.
Long term plans
When it comes to deciding whether or not you’re ready to apply for a mortgage, it’s critical to decide what your long term plans are. When do you want to retire? Will this house be the one you want to retire in? What large expenses do you have coming up in your life? Where do you see yourself in five years? Ten years? Twenty years? All of these answers should influence your mortgage decision making.
If the home you want to purchase isn’t one you intend to live in forever, consider an adjustable rate mortgage—or ARM—as you’ll get a lower interest rate initially and are likely to save a lot of money if you’re planning on selling the home before your initial fixed rate period expires. Thinking you want to retire early? You may want to consider a mortgage with a shorter term than the traditional 30-year term. Have expenses coming up in the future like putting the kids through college or paying for a daughter’s wedding? You may want to decide how you can strategically utilize your equity to pay for those things in the future. All of these things must be considered when you’re getting ready to apply for a mortgage.
Another very important thing to consider when you are deciding whether or not you are ready to apply for a mortgage is how much debt you currently have and want to get rid of. If you’re already a homeowner and are considering a refinance, it’s definitely important to decide whether you might want to pay off those mountains of credit cards with your equity when you refinance.
If you’re just considering purchasing a home, you will also want to consider your debt situation. Mortgage programs require that borrowers have low risk debt to income ratios, so if you have a lot of credit card debt looming, you will likely want to pay it off before you are ready to apply for a mortgage.
Know Your Credit
Examine your credit when deciding if you are ready to apply for a mortgage. You should go into the application having a pretty good idea where your credit scores fall and whether or not there are outstanding debts on your credit reports.
While some mortgage loans require a credit score of just 580 to be approved, borrowers will need to have negative items addressed on their credit reports before being approved for a mortgage. This means if you have collections, past-due loans or credit cards or defaults present, you should address them before getting ready to apply for a mortgage.
Be sure to obtain copies of all three of your credit reports: Equifax, Experian, and Trans Union—before you agree to a credit check for a mortgage loan. This way you can address the existing issues before you have your credit report pulled.
Income & Verification
Before applying for a mortgage, make sure you have all of the necessary documentation to support your income. This includes bank statements, pay stubs, and tax returns, so be sure to have all of the documentation at the ready at the time in which you find that you’re ready to apply for a mortgage.
Not sure exactly what you’ll need? Contact one of NLC Loans™’ personal mortgage advisors toll free at 877-480-8050 or visit our website for more information.