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5 Things to Do Before Applying for a Mortgage

April 7, 2022 by James Hendrickson Leave a Comment

Buying a home of your own is a huge milestone. Many people work towards buying a home for years, renting while they save up money for a downpayment. However, with home prices rising and a nationwide debt crisis, qualifying for the mortgage you need is only getting harder.

Before you go out looking for your dream home, you should try getting preapproved for a mortgage. This will help you determine whether you will be able to get a mortgage and what you will be able to afford.

There are steps you should take before applying for preapproval. Do the following 5 things before applying for a mortgage.

1. Check your credit score

Checking your credit score is the most significant step to take when you want to apply for a mortgage. Your credit score essentially provides an overview of your credit history. If you have struggled to pay back debt in the past or have outstanding debts, your credit score will be low. If you have never had credit before, you will not have a credit score. But if you have had credit, whether credit cards or loans, and paid it back without trouble, you will have a high credit score.

This is definitely a flawed way of looking at someone’s reliability. But it is the biggest factor that banks and other mortgage providers look at when determining whether to give you a mortgage. If your credit score is below 580, you are unlikely to get a mortgage from any provider and will have to work on improving it.

Checking your own credit score before applying is ideal, as hard credit checks carried out by financial institutions can lower your credit score. If your credit score is already low, you can avoid making it worse this way.

What do you do if your credit score is poor? The next step will help you begin to improve it.

2. Pay outstanding debts

Unfortunately, your credit score is not going to improve if you still have not paid the debts that caused it to drop in the first place. As such, you will need to pay for each debt that is on your credit record. If you don’t have the funds to do so, you will need to save up before beginning to rebuild your credit score.

There are options such as debt consolidation, which is when you take out a single new loan to pay off old loans. However, do your research before agreeing to a debt consolidation loan. If you do find a loan with a reasonable interest rate and you have no other way of paying your debts, it may give you a fresh start which helps you rebuild your credit score.

3. Don’t apply for credit for a full year

Once you have taken care of your outstanding debts, you will need to be very careful with your credit. In order to get your credit score to a better place, you should avoid applying for any credit for at least a year. This may be difficult if you are finding money tight, but it is necessary if you want to qualify for a mortgage.

Taking this time also gives you the opportunity to save more towards a downpayment. The bigger your downpayment is, the better rates and terms you will get on a mortgage.

4. Compare mortgage lenders

Once you have the credit score necessary to get a mortgage, you should compare the different lenders. These may include banks and private lenders, each of which provide various options. The most common mortgage is a thirty-year term, and that is what you will most likely be approved for.

Choose the 3 options with the best reviews and which will accept your credit score.

5. Apply for preapproval

Now it is time to apply to be preapproved for a mortgage. Applying to too many mortgage providers is not a good idea as it can have an impact on your credit score. However, you should get more quotes than just the one. Apply to your 3 top providers and wait for their quotes.

They will each offer you a specific amount with a specific annual percentage rate (APR). If one is lower than the others, use their offer to negotiate. Many banks and providers will lower their rates to get your business. It is important that you have a good idea of the current average rate for 30-year mortgages, so that you know what you are aiming for.

Getting preapproved for a mortgage is a big step towards owning your new home. The next step is looking within your price range and going to see different homes to choose the perfect one for you and your family.

Applying for a Mortgage

January 12, 2022 by Jacob Sensiba Leave a Comment

There’s always talk about home-buying and mortgages, but with interest rates being at all-time lows over the past few years, I feel like the talk about those things have picked up. Not only that, interest rates are likely going up this year so people are trying to get in before it’s too late. In this post, I want to talk about mortgages, how they work, and what happens when applying for a mortgage.

What’s a mortgage?

A mortgage is a loan you get from the bank or another lender to buy a house. When you submit an offer to buy a house, you’ll apply for a mortgage, and it’s a very involved process. More on that later.

In a mortgage, you’ll have options for what your term is. Your typical options are 15-year, 20-year, and 30-year.

You’ll also have to make a down payment. Current trends show that a lower down payment is pretty common. Depending on the type of loan, you can put down 3+%. And how much you put down matters. If you put down less than 20%, you’ll have to pay Primary Mortgage Insurance (PMI).

Here are the pieces of your typical mortgage payment – principal, interest, taxes and insurance, and PMI (if applicable). Taxes and insurance are commonly put in an escrow account and paid when they’re due by the lender.

Mortgage application process

From application to closing, it’s about 45-60 days. During that period, you’ll go through underwriting. In underwriting, they’ll have you submit documentation to confirm your credit report, annual income, current assets and liabilities, employment information, prior tax returns, among other things.

After you’ve cleared underwriting and they’ve confirmed everything, you’ll head to closing. At closing, you’ll sign a lot of papers. You’ll likely need to bring your checkbook with you as well.

There are closing costs associated with your mortgage. Some of these can be added to your total mortgage and some of them need to be paid. Closing costs are normally 3%-6% of the total mortgage and can include real estate commissions, taxes, insurance premiums, title fees, and record filing fees.

And if you’re buying, you’ll also need to write a check for the down payment.

Who gets a mortgage?

There is a slough of factors you need to meet when applying for a mortgage. Credit score matters. Usually, you’ll need at least a 620 credit score (all else being equal) to get a mortgage. Though the better the credit score, the better interest rate you’ll get.

The debt to income ratio needs to be under 50%. The lower the debt to income ratio (all else being equal) the more you can afford. If you have a 45% debt to income ratio and can afford a $250,000 mortgage, you’d probably be able to afford a $300,000 if your debt to income ratio is 25% (this is just an example, I didn’t do the math on this).

Condition of the home. With an FHA mortgage, they are a little pickier on the condition of your home. Usually, it’s just the outside of the home they’re picky with. Chipped paint is a typical thing they take issue with, so just be aware of that.

Applying for a mortgage is necessary for most people so it’s important you understand how they work.

Disclaimer:

**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com

Jacob Sensiba

My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com

www.crgfinancialservices.com/

Moving Back to the House

January 27, 2021 by Jacob Sensiba Leave a Comment

For today’s personal reflection, I’m going to talk about moving back to the house that K and I are currently renting.

K is my son’s mother and we are getting back together. I’m excited to grow with her and to make our relationship into something even better than it was before. But that’s not the point of today’s post. Today we’re talking about moving back to the house that’s being rented.

Current living situation

As a result of K and I getting back together, we had a conversation about where we wanted to live and raise our son. My current place that I’m renting was an easy choice because it’s within two minutes of my work and has a large enough basement that our son can play when it’s cold and/or rainy outside.

We’re moving!

After we had a conversation and I had time to reflect, the better choice is to move back into the house we own together. Our renters are moving out at the end of their lease and mine is up at the same time. I feel more at home in that house and in that city than I do currently. The drive is significantly longer, but I enjoy driving. It gives me time to either get into work mode or get out of work mode (depending on the time of day).

At the house, our son has a yard to play in, there are two playgrounds/parks within a few blocks, and we are near some water. What also played a role in the decision is where our son is going to school. We decided to enroll him in a private school, which makes the location of where we live a little less important.

Besides the drive, the only other thing I don’t like about this house is the basement. It’s a very old home. Over 100 years old, so the basement is very short and uneven.

The short-term plan

What we decided to do is to stick it out. We’re going to live in this home for a few years, pay down some outstanding debt, and save for a down payment. When we’re ready, we’ll look for a new home that checks all of our boxes.

There are some big and exciting changes coming down the line, and I’m very excited to take them on with K.

What Is the Grace Period for Mortgage Payments?

October 19, 2020 by Tamila McDonald Leave a Comment

Many households struggle to keep up with their mortgage payments. In some cases, uncertain financial times – like those created by the COVID-19 pandemic – are largely responsible. However, there are certainly other triggers that may make handling your payment difficult. That’s why understanding your mortgage payment grace period is so important. It lets you know how much time you have to manage your obligation before there are serious ramifications. If you want to learn more about the grace period for mortgage payments, here’s what you need to know.

What Is a Mortgage Payment Grace Period?

First, it’s important to understand what a grace period is and what it isn’t. In the simplest terms, for mortgage payments, a grace period is a specific amount of time after your payment due date. As long as your payment comes in during that window, you typically don’t experience any repercussions for your payment technically being late.

For example, by getting your payment in before the grace period ends, you shouldn’t face any late fees. Additionally, the lender usually won’t ding your credit.

Now, you may or may not accrue interest on the unpaid amount during your grace period. Whether that occurs depends on how interest is calculated on your loan and whether the lender opts to delay charging interest on that amount until the grace period expires.

How Do Grace Periods for Mortgage Payments Work?

A grace period is an automatic benefit that is part of your mortgage agreement. Generally, you don’t have to do anything to take advantage of it, aside from ensuring your payment comes in before that time period ends.

However, it’s best to review your mortgage to confirm precisely how yours works. The grace period clause will outline if there are any steps you need to take, such as contacting your lender to let them know that your payment will be late or something similar.

Why Do Lenders Offer a Grace Period on Mortgages?

Grace periods may seem like an odd thing for lenders to offer from a business perspective, as it prevents them from charging late fees the day after your payment is technically late. After all, fees can boost profits.

The trick is, many mortgage lenders are required to offer grace periods. Many states have laws designed to protect borrowers from late fees, including some rules that apply specifically to mortgages.

If a lender operates in a state with a grace period law, they have to offer one. If they don’t, they are breaking the law, and that can come back to hurt them.

However, there can also be other motivators for offering grace periods. For example, back when most people paid their bills by check, mail delays could make a payment seem late when it was actually sent out on time. Grace periods helped account for issues with mail delivery, ensuring borrowers weren’t unfairly penalized. While most people don’t pay by check today, it’s technically still an option available, so some lenders may maintain their grace periods based on that.

Similarly, grace periods can ensure that holidays don’t cause a payment to come in late. Banks generally don’t process transactions on weekends and federal holidays. If a person’s mortgage bill was due on a day when the banks aren’t processing transactions, it could make their payment seem late when it really isn’t.

Additionally, while most mortgages are due on the first of the month, people’s pay schedules may not align with that date. By offering a grace period, it gives borrowers a bit of flexibility, allowing them to send a payment when they receive their paycheck.

How Long is the Mortgage Payment Grace Period?

Precisely how long your mortgage payment grace period is depends on a few factors. Where you live plays a role, as local laws may determine the minimum length. Additionally, who your lender is matters.

Lenders can always choose to offer grace periods that are longer than state law requires, they just can’t make it shorter. As a result, not all lenders within a state use the same time frames.

However, with all of that in mind, a typical grace period lasts 10 to 15 days. If you want to know precisely how long yours is, you’ll need to check your mortgage paperwork, as it will be stated in a clause there.

In some cases, your grace period may also be noted on your monthly mortgage statement. Similarly, that information may be listed in your online mortgage account. But, if you don’t find it there, your best bet is to check your physical mortgage paperwork. If you can’t find the clause, then you may want to contact your lender directly and ask.

What Happens If I Can’t Pay Before Grace Period Ends?

Once the grace period passes, there can be consequences for not making your mortgage payment. The most common ones are late fees and potentially a ding on your credit report.

Late fees – like grace periods – are part of your mortgage agreement. That document will say whether you owe a flat fee, a percentage of your mortgage payment, or another amount for being late.

If your payment is 30 days late or more, then your lender can report the missed payment to the credit bureaus. At that point, you’ll see a derogatory mark on your credit report and, likely, a decline in your credit score. That derogatory mark can remain on your report for as long as seven years, causing long-term harm to your score.

If you know that you can’t make the payment before the end of the grace period, contact your lender. Depending on your situation (the reason you are having trouble missing the payment), there may be assistance available that can help you avoid fees and damage to your credit score. For example, you may qualify for a forbearance, ensuring you won’t be charged fees, penalties, or interest beyond the usual amount for a specific amount of time.

Speaking with your lender allows you to learn more about your options. That way, you can make the right financial choices based on your circumstances and potentially save your home and credit score while avoiding severe monetary penalties.

Do you think the grace period for mortgage payments is long enough? Why or why not? Share your thoughts in the comments below.

Tamila McDonald

Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.

Pay a Little Extra on Your Mortgage – What a Difference it Makes

July 2, 2013 by Stan Poores 10 Comments

Could you adjust your budget and pay a little bit more toward your mortgage every month? Perhaps you can save a small amount and make a lump sum payment once per year?

It might not seem like it, but paying a little bit extra can actually make quite a big difference over the length of your mortgage. It is possible to take years off the loan by simply paying a small amount more per month or making one extra payment per year. When you shorten your mortgage loan, you also end up saving thousands in interest rates over the years.

You might not feel like you can afford to pay extra money on your mortgage, but there are likely a few adjustments that you can make to your budget so that you can squeeze in more payments.

Paying Biweekly Rather Than Monthly

One strategy for paying more on your mortgage is to change your payments to biweekly rather than monthly. Instead of paying a monthly amount, you will pay half the monthly payment every two weeks. As there are 52 weeks per year, you will end up making 26 payments rather than 24 if you made two payments per month. However, you will not notice the difference to your monthly budget.

Make a Big Lump Sum Payment Every Year

Another way to reduce your mortgage is to make a single large payment from the amount that you owe. When you do this, it will be taken directly off the capital, which will mean that your mortgage term becomes shorter. For example, if you get a Christmas bonus at work you could use the amount to pay off some of your mortgage. By doing this, you can reduce your mortgage loan length by several years.

Round Up Your Payments

Why not round your mortgage payment to the nearest hundred? For example, if your monthly payment is £573.45, you could pay £600 instead. This will not affect your budget too much, but it will mean that you end up paying an extra £26.55 per month, which adds up to an extra £318.60 per year.

To find out more about how you can pay more on your mortgage, talk to a UK mortgage broker such as First Mortgage.

Photo: 401(k) 2013

Mortgages for a Young Borrower

October 6, 2012 by Average Joe 8 Comments

Thanks to RefinanceMortgageRates.org for the guest post!

For a young adult, purchasing a home has many advantages. Home owners can quickly establish good credit, accumulate equity, build net worth, and create a sense of stability for themselves. Also, going through the process of buying property at a young age allows buyers to become familiar with a good long term asset class: real estate.
However, before a young adult decides to embark on home ownership, there are a few important points they absolutely must understand. By understanding the steps involved in the mortgage process and accurately planning your budget, you will have more success in keeping and maintaining your loan.

How Do I Establish Credit to Qualify For A Loan?

To secure a good mortgage interest rate, you will need to have an established credit record and at least two years on the job at the same company at a consistent pay rate.
Establish your credit by finding and using a secured credit card. This type of credit requires you to place a deposit against the card which equals your credit limit. Don’t be confused between a secured credit card and debit card; only the former will ensure that the company reports your good standing to the credit bureaus.

As you begin making timely payments on your new card, look to establish other lines of credit. Do not, however, create too many lines. Mortgage companies worry about a metric called your debt to income ratio. Too much debt will show you with an unbalanced credit health, and will make it difficult for you to secure good mortgage interest rates. A good rule of thumb is to never exceed 50 percent of your credit limit in charges on your credit clines and cards. This will help you achieve the highest credit score possible without a mortgage.

After two years on the job and a credit history of 18 at least months, it’s time to begin shopping for a mortgage!

What Are The Down Payment Requirements?

Place at least 20% of the purchase price down on the home you’re purchasing to receive the best mortgage rates from a commercial lender. I know what you’re thinking: this could be a significant amount of money for a young up-and-coming borrower. If you have the ability to save this sum in a short time…do it. This will secure low interest rates and create instant equity in your new property.

If you’re unable to save such a large amount in a short period of time, check out something called “mortgage insurance.” This type of insurance is offered by agencies such as the Federal Housing Authority (FHA), Veterans Administration (VA), Department of Agriculture (Farm Home), and occasionally even from private insurers.
Mortgage insurance allows you to place as little as 3.5% down on your home. Here’s why: the insurance policy states that the mortgage will be paid even if you default. Banks feel much more comfortable with this in place. However, there’s more good news about these programs. They allow for lower credit score qualifications, enabling more people to purchase homes.

As a last resort, you may also wish to consider borrowing money from family or friends for the large down payment. It should be noted that many banks now frown on this method for down payments. You will need to speak with your preferred lender to glean whether they’ll allow you to borrow money for a down payment.

How Much Loan You Can Afford? (Income Guidelines)

This is perhaps the most important thing a young borrower should understand. Your monthly mortgage payment should never exceed 33% of your monthly bring home pay. For example, if you bring home $3000 a month after taxes and insurance premiums, your mortgage payment should not exceed $990 per month. By keeping to this guideline, you should have enough budget room to easily afford your loan.

Many lenders will provide mortgages that are up to 40% of bring home pay. This creates risk for both the borrower and the lender. The average person needs at least 67% of their income to pay for living expenses and saving for their future. Once you pass this threshold, other areas of your life are certainly going to feel the weight of the mortgage.

The best thing you can do for your credit and lifestyle is to only purchase a home you can afford on your current salary. As your life develops, your career blossoms, and your need for a larger home increases, you can sell your current home and purchase one based on your new income and desires.

This information was provided by RefinanceMortgageRates.org. Click here for more information on mortgage, refinancing and housing.

Photo Credit: Kimubert