Gardner: Things to consider before applying for a mortgage (column)
July 11, 2017
It is summer — that time of the year to soak up the sun and enjoy glorious days of perfect weather. Engaging in outdoor activities, taking vacations and finding things to do for the kids are all part of the season. It is also the time of year that families look for a larger home to better accommodate their needs. If you are one of those families, have you done your homework to determine what price home you can afford and whether your finances are up to scrutiny by a prospective lender?
I asked Darlena Marmins, a mortgage banker with Colorado State Bank & Trust in Frisco, what are the steps a prospective buyer should take before applying for a loan? Darlena is highly regarded in Summit County and has helped me personally with mortgages in the past. She indicated that the three most important things to do are:
• Check your credit score. Request a free copy of your credit report and review it for discrepancies. If you find any, send a letter to the credit agency and creditor to dispute any information that is wrong.
• Choose an experienced local lender to use and obtain a Pre-Qualification Letter. This will inform you as to how much home you can afford and make you a more attractive buyer.
• Choose an experienced local Realtor. By giving him/her a copy of your letter, your Realtor will be able to find you a home in your price range and negotiate in good faith for you as a serious home buyer.
The minimum credit score to get a conventional loan is 620 and ideally a credit score of 740 or higher will help you obtain the best interest rate available. Do not settle, though, for just reaching the 740 threshold. 850 is the highest score you can obtain and a very lofty if not impossible goal, but striving for 800 or more is realistic if you watch how you handle credit. A high credit score makes you very appealing to all creditors and gives you more leverage and flexibility. In the case of mortgages, the higher the credit score and down payment you have, the higher the debt-to-income ratio can be. The reverse is also true — the lower your credit score and down payment, the lower your debt-to-income ratio must be. Down payments take time and a financial commitment, while a good credit score costs nothing and comes from an awareness of what affects your score and then monitoring and protecting it. Make it a game to see how high you can get it.
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Regarding the debt-to-income ratio, lenders calculate this number by adding up your monthly expenses to service debt including mortgage payments, car payments, student loans and minimum payments for credit cards and any other required monthly payments. They then look at what percentage of your gross monthly income is needed to service your debt. Most lenders prefer a percentage that does not exceed 36 percent. Another type of debt-to-income ratio lenders look at relates only to housing costs. Your potential monthly principal, interest, taxes and insurance are added up and divided by your gross monthly income to arrive at a housing ratio. Lenders do not like to see this percentage be more than 28 percent of your income. This is one more reason why a lower interest rate allows you to buy more house. Also, making more of a down payment not only lowers the mortgage payment, it will lower the housing ratio and make it more likely for you to qualify. Plan on putting down at least 10 percent, although some lenders may require less. If you have a down payment of 20 percent, you do not have to pay private mortgage insurance monthly. Lenders require PMI to protect themselves, not you.
Choose a lending institution with a longstanding history and good reputation in the community. The mortgage broker/banker should also be very experienced and understand the local housing market. Ask your friends for referrals, and your Realtor should also be able to refer you to someone that over the years has successfully helped his clients receive mortgages. Everything should be transparent with the lending institution during the entire application process, and a good team always has someone available to answer questions along the way, including the status of the loan.
Buying a new home should be exciting and not be marred because you were unprepared or you chose an inexperienced lender. Now that you are prepared, have a wonderful summer!
Nancy Gardner is a Certified Financial Planner. She is not a real estate attorney. She and her husband Bill and dog Daisy split their time between Summit County and Montgomery County, Texas. Send your questions to firstname.lastname@example.org.
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