When you see that interest rates are low, you're probably ready to start the mortgage application process. This is a delicate procedure, so make sure you have everything planned out beforehand. Even if you have your potential home picked out, you still have a little work ahead of you – mainly, dealing with your finances. This can be a stressful time, but it'll be easier if you do some homework. Looking at your credit score and investigating loan options can help you understand what you're getting into. Here are a few components to check out before applying for a mortgage:
Check your credit report
As interest rates continue to decline, you probably want to strike when the iron is hot and apply for a loan as soon as possible. This mindset is all well and good, but this process is intricate and can take some time. You should start preparing your finances a few months before you apply so you have your best foot forward when meeting with a lender. The first step is to scan over your credit report and make sure everything is in order. Check that the balances of your accounts are correct and there are no erroneous debts to your name. If you spot a mistake, contact the credit bureau that issued the report and the lender you borrowed from. Discuss with them what needs to be fixed and ensure it gets done.
Pay off balances
Having a chunk of debt can make paying for a mortgage all the more difficult. This is why it's a good idea to start planning to fix your finances well before you apply for a loan. A good route to take is to contribute more to the account with the highest interest, as this rate can result in expensive charges. Remember to make all your payments on time too, as lenders will interpret that promptness as you being responsible. If you need help remembering the due dates, try setting up automatic payments through your bank or lender.
Refrain from using cards for 45 days
After you've paid off your debt, you want to give yourself a little wiggle room before applying. Try not to use any of your paid-off accounts for at least 45 days before you actually apply. Doing this will allow you to improve your credit-utilization ratio, and your credit report will be much improved by the time you apply for your mortgage.
Figure out a loan that is right for you
Taking care of your credit is only half the battle during your preparation. Picking the right type of loan can make all the difference in the world, as some payment plans can be easier to deal with than others. You're usually offered two loan options when it comes to buying a house: a 15-year mortgage or one that lasts for 30 years. If you're content with the way rates are when you apply and you want a steady line of payments, you can go with a fixed-rate mortgage. If you feel rates will improve over the years, an adjustable-rate mortgage might be the best choice.
Continue these good habits
After you've been approved for a loan, you should hold off on doing anything crazy with your finances. You never know if the lender will want to pull your credit report again or double-check your score, so it's a good idea to stand firm.