What to expect: the loan process

Before completing a mortgage application or even strolling through an open house, make sure that you are prepared for the mortgage application process. You’ll need to know these three things:

1、 Your credit health

2、 Your monthly budget (income and expenses)

3、 Your mortgage budget (home price and available down payment)

Your credit health

Before applying for a mortgage, obtain your credit score and check it for errors. Since you may shop for homes over the course of several months, consider subscribing to a service that provides regular credit report updates for around $12-20 a month. Your estimated credit score should be least 675 and preferably above 700. Anything less and you will need to find a highly-qualified cosigner or take time to improve your credit before getting a first mortgage approval.

Your monthly budget

The next step in preparing to apply for your first mortgage is to document your monthly income and expenses. Gather paystubs and up to three years of tax returns. Mortgage underwriters may also ask to see your monthly expenses. Also, any large recurring monthly expenses (like an auto loan) will hurt your chances of getting approved for a mortgage. If possible, pay these loans off or, at the very least, avoid taking any new loan payments on prior to applying for a first mortgage.

Your mortgage budget

Before ever speaking with a mortgage officer, determine how much house you can afford. A good rule is that your total housing payment (including fees, taxes, and insurance) should be between 28 and 35% of your gross (pre-tax) income. For example, if together you and a co-buyer earn $80,000 a year, your combined maximum housing payment would be between $1,866 and $2,333 a month.

It can be difficult to equate this monthly payment to a fixed home price, as your monthly housing payment is subject to variables like mortgage interest rate, property taxes, the cost of home insurance and private mortgage insurance (PMI), and any condo or association fees. In some cases, taxes, insurances, and fees may be equal to or greater than your actual mortgage payment.

Next, determine how much you can save for a down payment to put towards your home. In today’s market, expect your mortgage lender to require at least a 10% down payment. If you have it, consider putting 20% down to avoid PMI—costly insurance that protects your mortgage lender should you foreclose prior to building sufficient equity in the property.