Step 1. Check Your Credit Score
A credit score is a measure of risk for a lender if they lend to you. Unless you have cash, the crucial first step is to check your credit score when you first start thinking about buying a house. In order to get a mortgage, lenders have a minimum credit score that you must meet. Generally, you can’t get a mortgage with less than a 580 and most lenders want to see a 620 or above. A higher score will also help you qualify for better rates.
Get a copy of your credit report.
Trans Union, Experian, Equifax are the three major credit bureaus. You have the right to order a free credit report from each of these bureaus each year through AnnualCreditReport.com or you can purchase one at any time. Equifax and Experian have a report that includes credit info from all three in one report. All three bureaus use FICO scores to generate their scores. FICO is a company that develops and maintains credit scores using data from other bureaus but it is not the only score they may be using. You can get more information and an initial look at your credit score with a free report from HubWallet, Credit Karma and Credit Sense, but do not rely solely on their score, it may not be the same number you get when a lender runs a credit check.
Credit Score Scale
720 is excellent
680-719 is good
620-670 is fair
580-619 is poor
579 and lower is bad
If your credit score isn’t where it needs to be, there are things you can do to bring it up. Paying down credit cards and making payments on time will help a lot. You can also dispute incorrect information on your reports and have it removed.
Step 2. Put your Finances in Order:
When you apply for a mortgage loan, you finances are under a microscope, so prepare a head of time. Evaluate your cash flow; you need to know how much money is coming in and how much flows out each month. Lenders will be looking at how much you owe each month compared to your gross monthly income, Debt to Income ratio (DTI). They typically want to see no more than 50% of your gross income going toward your fixed expenses. Fixed expenses include your rent or mortgage payment, property taxes, association dues, home owners insurance, car loans, student loans, credit cards and other fixed payments that will show up on your credit report. Variable expenses like utilities, phone and cable are not included in your DTI.
You will need to have some money put aside to use for an initial deposit, down payment, inspections, closing costs and moving expenses. How much you need to have saved up will depend on, and also determine, the type of loan and the purchase price for which you can qualify.
Step 3. Gather your documents:
Specific requirements of any given lender may vary but this in general these are the types of information you will need to put together when you start applying for a mortgage loan. Lenders will want to see proof of your income, your debts and your assets. You may be asked to show records documenting 30 days of pay stubs, the last 2 years of W2 forms, employment history, residence history, and tax returns. You should gather at least a few months worth of bank statements, retirement and investment accounts and document rent or mortgage payments. Prepare to show documentation of debt payments and if you have had any foreclosures or bankruptcies or been party to any lawsuits in the past 7 years. You may need to show divorce records, proof of alimony and/or child support. Additionally, you need to be able to document your down payment and closing cost money. Be prepared to show how that money has been accumulated and have a gift letter if you have been gifted any money for the down payment.
Now that you have done the prep you can start the process of getting a mortgage.
Other pages in this guide:
As you read through the guide, remember that I can refer you to mortgage professionals and real estate attorneys who can help you along the way. I would be happy to talk to you about any questions you may have. Please take a few minutes to tell me about your situation. I am here to help, because your home matters.
Tracy Shubin, REALTOR®
Fletcher Realty Services, Inc.