Once you have an idea of what kind of mortgage suits you best, learning how to prepare for getting a mortgage is the next step.
The best place to start is to schedule an appointment to meet with a loan officer to prequalify for a mortgage. That’s a big step, but if you come to the meeting prepared, you can get the process going smoothly and move on to more important things (like finally shopping for that new home!).
Lenders need a lot of documentation to get you approved for a mortgage, and the more you bring up front, the less you’ll be bothered down the line. Know what your loan officer needs, prepare ahead of time, and it will be smooth sailing to the closing table.
With that said, we’re going to take you through the steps of how to get a mortgage pre-approval so you can be ahead of the game when shopping for your dream home.
Let’s Talk Money
Hopefully you’re able to put a down payment on your home, so first check your savings account — how much money do you have to put towards a down payment? Keep in mind that you may not want to completely drain your savings account for your down payment, as you’ll still have many expenses to cover.
You’ll need money to pay for the move, because even if you don’t hire movers, it will still cost you some extra gas money.
Additionally, when you finally move in, you’ll undoubtedly stumble upon a list of items you need from the hardware store (shelving, nails, paint and supplies, etc.), not to mention the small repairs or renovations you’ll want to tackle to make your new house feel like home.
These individual costs may seem minimal at first, but they add up quickly and can turn your budget upside down in a hurry. Make sure to set aside a little money in addition to your down payment for miscellaneous costs you didn’t anticipate.
How Much Are You Comfortable Spending?
It’s a wise idea to know the amount you’re comfortable financing, and the highest payment you feel comfortable adding to your budget, before you meet with your loan officer.
If the loan officer says you’re approved for more than you were anticipating (which does happen), don’t consider maxing out your budget if you don’t feel comfortable with the higher mortgage payment.
Keep in mind that mortgage payments include more than the principle and interest amounts, they also include mortgage insurance, homeowner’s insurance, and property taxes that are escrowed in.
Don’t break your budget when you’re at the bank. Know what you want before you go to that appointment, and stick to your own budget so you don’t end up house poor.
The mortgage term, or the number of years you will have your mortgage for until it’s paid in full, has a big impact on how high or low your mortgage payment will be. Traditional mortgages offer anywhere from 10 to 30 year terms, with 30 year terms being the most popular.
You’ll need to consider how long you want to have a mortgage and what effect that term will have on your budget. For instance, you may only want a 10 year mortgage, but the payment for that will obviously be much higher than a 20 year mortgage.
If you borrow less than the bank prequalifies you for, consider if you can fit a higher payment into your budget by shortening your term. The payment will be higher, but you will often qualify for a better interest rate if you opt for 15 years or less, and the interest savings over the term of the mortgage will be substantial.
To get the smallest payment, you can apply for a 30 year loan, but consider where you’ll be 30 years from now before you saddle yourself with a payment for that long. The mortgage term you choose can affect your budget for decades, so it’s an important decision.
Don’t Forget About Closing Costs
In addition to your down payment, many borrowers tend to forget about the closing costs associated with getting a mortgage. It costs a lot of money to get a mortgage due to closing costs and prepaid funds for your escrow account, and these costs typically add a few thousand dollars to your mortgage.
- Closing costs are all the fees associated with getting a mortgage from a lender, which include fees for the title company, appraiser, lender, underwriting company, and taxes. These fees add up quickly and average about 4-5% of the purchase price.
- Prepaid fees are the prepaid property taxes and homeowners insurance that will be used to set up your escrow account, if you opt to have one.
An escrow account holds the monthly insurance and tax amounts that are collected in your payment each month. For example, the annual insurance premium amount divided by 12 months is the amount added onto your monthly mortgage payment for the homeowner’s insurance. The same rule applies to the annual property tax bill.
It’s a wise idea to have an escrow account if you don’t want to fool with paying for your taxes and insurance out of pocket every year when they come due.
Many lenders set up an escrow account for you when you close on your mortgage, and typically collect about 15 months worth of homeowner’s insurance premiums and 6 to 12 months of property taxes to be held in an account and paid out by the lender when those bills are due each year.
Keep in mind that even if you set aside a hefty down payment, you may still need several thousand dollars to pay for your closing costs. You can opt to pay for closing costs and prepaid funds out of pocket in addition to your down payment, or you can try to get the seller to pay for some (or all) of those.
Many buyers opt to ask the seller to pay for all or a portion of their closing costs. If this is an option, it will need to be specified and agreed upon in the sales contract, so talk to your Realtor first.
Make an Appointment
Don’t be nervous to meet with a loan officer — they want to close your mortgage because they’re making money off of you. They want you there, and they want your loan to get approved for that very reason.
Just remember that they’re working for you, so find someone who appreciates your business.
You should also consider shopping around if you feel like your bank has higher than average fees or interest rates. These fees are sometimes negotiable, so it’s in your best interest to shop around.
The worst that can happen is that you save a little money!
What You Need to Bring to the Appointment
Once you make the appointment with your loan officer, and to make the application process as easy as possible, make sure to bring the following items that apply to your situation.
- Paystubs. If you’re a W2 employee (or get paid commissions), your loan officer will need 2 month’s worth of paystubs. A loan officer needs to be able to document the amount of money you make, and this is the first step towards doing that.
- W2s. The loan officer will also need to prove your history of earning an income, so bring in any and all W2s you’ve received in the last 2 years, along with your hire and termination dates for each company (if you’ve worked for more than one company in the last couple of years).
- Bank statements. You’ll need to prove that you have the money for your closing costs and down payment, and some loans may require you to have reserves set aside in your account after your closing. Make sure to provide your last 2 bank statements.
- Many underwriters are also required to source any non-payroll deposits that appear on your bank statements, so come prepared to detail what your other deposits are, if applicable. This isn’t an unusual practice, especially if you are qualifying for a USDA/RD loan where the underwriter is required to document all income.
- Tax returns. Your last 2 year’s tax returns are especially important if you’re self-employed, because it may be one of the only ways the loan officer can prove your income to the underwriter. Bring along any schedules that may accompany your basic tax return, because the underwriter will ask to see everything.
- Retirement, disability, or social security income documentation, if using this income to qualify. A retirement or social security statement along with bank statements to show the funds deposited into your account will usually suffice for this.
- Photo ID. You must prove who you are! A driver’s license or passport are the easiest forms to bring.
If you bring in all of this documentation up front, your loan officer will have more than enough information to start the approval process.
Once you’ve discussed your financial situation with your loan officer, they will pull your credit report and (hopefully) be able to issue you a prequalification letter on the spot. A prequalification letter specifies the amount you are approved to borrow, and the contact information for the bank or broker.
Providing a mortgage prequalification letter to your realtor lets them know that they can begin showing you homes immediately. Many seasoned realtors won’t even show houses to prospective buyers without a prequalification letter.
A prequalification letter is also helpful when sending over an offer on a home. It lets the buyers know you’re a serious bidder and is especially advantageous if you become involved in a bidding war.
With your preapproval in hand before you even find a house, you’ll be ahead of the game.