Getting the right mortgage is important. But to get the perfect loan at the best rate, check these four things off your to-do list before applying to lenders or committing to debt.
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1. Check your credit score
Mortgage lenders focus a lot on your credit score to determine if you are well qualified to borrow at a competitive rate. So make sure your score is as high as possible.
If you get a copy of your credit report and your score is lower than you expected, check for any errors affecting your history. Check out any late payments you might ask creditors to remove from your record to help boost your score. And you can also pay off your debts to improve your credentials before you try to borrow.
2. Establish your housing budget
Lenders tell you the maximum amount they will lend you. But you might not want to take the biggest loan your lender has allowed, so you can avoid spending a lot of your income on housing.
Before approaching a lender, take a close look at your overall budget and financial goals, and set your own housing budget based on what’s right for you.
3. Save for a down payment
Most lenders require that you deposit at least some money for a home loan. While some allow as little as 3% down, you usually want to do more if you can. This is ideal if you can save a 20% down payment, or $ 20,000 for every $ 100,000 of housing costs.
A larger down payment means you’re not paying private mortgage insurance (PMI), which protects lenders when buyers make small down payments – there’s a risk the home won’t sell enough to pay off the loan in the event of seizure. PMI can be expensive and it protects the lender, not you, even if you pay for it.
Larger down payments can also help you qualify more easily with a wider choice of lenders and lower rates. They also reduce the risk that you will owe more than the market value of your home, which creates problems if you move or refinance.
4. Look for mortgage options
Finally, it is useful to know what type of loan you want so that you can choose lenders who specialize in this type of mortgage. Decide if you want a government-backed option, such as an FHA or VA loan, or if you prefer a conventional loan. Government guaranteed loans may be best for less qualified borrowers because eligibility may be easier, but they often come with fees that conventional loans do not have.
Following these four steps can ensure that you’re ready to borrow and that you’re likely to get the right kind of loan, for the right amount, at a competitive interest rate. This is crucial when you agree to take on what will probably be the largest debt you will ever have.