Home ownership is something you have always dreamed about and now it is fast becoming a reality. You have been out and about looking at houses and have found the perfect domicile for you and your significant other. It has everything you could possibly want, from the white picket fence encompassing the front yard to the garden pond and meticulous landscaping in the back; it is the home of your dreams. But you have never applied for a home mortgage before, and the nagging question at this point is how to qualify for a loan.
Make sure you can afford the home you have your eyes on. Since a prospective lender is going to do it anyway, you should take an honest look at your income and liabilities -- how much you earn and how much you owe. Most lenders cap your monthly mortgage payment, including principal, interest, insurance and taxes, at 30 percent of your gross income. Additionally, they want your combined mortgage and other debt to be less than 40 percent of your income. You may qualify for an exception to these rules if you have excellent credit or if you can come up with a large down payment.
Check your credit report. Six months before you even start to look for the home of your dreams, get a copy of your credit report. The Fair Credit Reporting Act dictates that you are entitled to a free copy of your credit report from all three credit-reporting agencies once every 12 months. Obtain this free credit report from annualcreditreport.com.
Fix any inaccuracies in your credit report. You have a right to dispute any incomplete or inaccurate information. Be sure to dispute inconsistencies with each credit-reporting agency. TransUnion, Experian and Equifax have different procedures for disputes, but they must investigate your claim, according to federal law. If you prevail in the investigation, the agency should remove the negative information within 30 days.
Get a copy of your credit score. Lenders use the score as a beacon to determine your interest rate. Top scores, 760 to 850, get the best rate, while lower scores, 580 to 619, can expect an interest rate of up to 4 percent more. It will cost you some spare change to get your credit scores, but it’s worth it to find out what the three credit reporting agencies will tell your prospective lender. Be sure you get a number from all three agencies as the figure can vary drastically from one to another.
Organize the paperwork. Once you have decided you can afford the home of your choice and have your credit report and credit score in their best possible shape, it’s time to gather all the paperwork necessary to apply for the mortgage loan. The prospective lender will provide you with a list of document he will need, but you can get ready in advance by having available two years of income tax returns and associated W-2s and 1099s, a month of pay stubs, copies of your drivers license and Social Security card, support award letters, court-ordered support payment documents, and all pages of your last two monthly bank statements.
- Shop around for the lender offering the best rate.
- Check back to make sure the credit reporting agencies fix any inaccuracies you discovered in your credit report.
- Checking your credit report yourself will not adversely affect your credit score.
- Keep new credit at a minimum when anticipating a mortgage loan.
- Merchants checking credit can lower your credit score so keep applications at a minimum or, better yet, don't apply at all.
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