5 Things to Do Before You Apply For a Mortgage

Before you start submitting your mortgage application, there are some things you need to do to prepare for the process.

1. Decide on a mortgage amount. The amount you want or need to mortgage versus how much of a mortgage you can afford may be two different numbers. You need to have a realistic idea of the mortgage amount you can afford. One of easiest ways to figure out how much a mortgage payment is going to be based on the mortgage amount you want is to use a mortgage calculator or refinance calculator. You can input the amount of the mortgage and the current interest rate to see what the monthly payment comes out to be. You can then compare the monthly payment with your budget to sit if the two fit. You can continue to adjust the mortgage amount or type of mortgage to see how this changes the monthly payment until you create an affordable scenario.

2. Decide how long you’ll live in the home. People often have the misconception that if the current interest rate is less than what they are paying now that they should run out and refinance. Since there are closing costs involved in a refinance, getting a lower interest rate may not be enough to truly save you money. In order to determine if you will recoup your closing costs in a refinance, you should do a break even analysis, which will tell you how long it will take you to recoup your closing costs. If you’re planning on being in the home longer than it takes you to break even then it is usually beneficial to refinance.

3. Include the cost of homeowners insurance and taxes. You may be able to afford the monthly mortgage payment, but it’s also important to consider the other costs involved in owning a home. Find out the estimated taxes and insurance for the home and be sure to add this cost to your monthly payment. This will provide a full cost view as to whether or not you can afford to buy a home.

4. Check your credit report. Especially during the economic downturn, a high credit score is more important than ever to get approved for a mortgage. Generally speaking, lenders are looking for credit score of 720 or higher. You’ll want to get a copy of your credit report from each of the three credit agencies (TransUnion, Experian and Equifax) to make sure that all of the information is correct. If you find any incorrect information on your credit reports, correct it by contacting the agency or opening a dispute with the credit bureau reporting the negative information.

5. Get pre-approved. If you’re purchasing a home, you may want to get pre-approved for a mortgage before you start house hunting. Not only will a pre-approval letter from a mortgage lender allow you to look at homes in your price range, but it may also be a bargaining tool for negotiating the purchase price of the home.

Applying for a mortgage, especially in today’s economy, isn’t always an easy task. You may be able to streamline the process by doing some preparation ahead of time. Before you apply for a mortgage, take a look at your financial situation and go through these seven steps to make sure that obtaining a purchase mortgage or refinancing your current one is a viable option for you.

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