One thing to know about the mortgage process is that there’s a lot of work to do, even if this is your second or third time doing it. It could be tempting to take a shortcut, like just going with your previous lender (you know them, they know you, so why not?). But without shopping around, you could miss out on better offers.
At the same time, if you assume you know certain things (checked your DTI lately?) and you’ve overestimated its appeal to lenders, you could be surprised by the mortgage loan offers you receive.
In other words, applying for a mortgage is…like applying for a mortgage: There are just some things you should – or should not – do to be prepared and to help you get the best offers you can.
You may feel confident that you know your credit score, but it doesn't hurt to check it before applying for a major loan like a mortgage, for a few reasons:
1. Your score can change from month to month for things like an increased credit card balance, closed credit card account or new credit card applications.
2. It’s an opportunity to identify errors and fraud. If you’re a victim of identity theft and fraud, you could see your score drop if scammers have done things like applied for loans, opened and used credit cards and racked up late of payments under your name.
3. It could help you know what to expect: The higher your score, the better interest rate you may be able to get on your mortgage. (This article, about credit scores and buying a home goes into more detail.)
How to check your credit score: You can request a free report from each of the main credit bureaus every 12 months – Equifax, Experian and TransUnion. If you find errors, be sure to dispute them before they wreak havoc; the Federal Trade Commission explains how here.
The 30-year mortgage has become as synonymous with America as apple pie. But you don’t have to go with that time frame – it could be worth considering shorter terms like the 15 or 20 year options. With shorter terms, you could spend less on interest (typically in exchange for a higher monthly mortgage payment). A mortgage lender could help you get a clear estimate of loan terms and payment options you could qualify for.
And speaking of mortgage lenders, don’t be afraid to shop around before you commit to one. Not all lenders are created equal – each may offer different rates and charge different fees, so it’s smart to compare your options.
Taking a new job doesn’t mean you won’t get a mortgage, but it could slow down the application process in part because lenders want to know that your job and income are stable, so any major changes could be a red flag. These can include switching careers to a completely new industry, accepting a different salary payment structure (say moving from predictable pay to commissions, for example) or leaving a staff position and going freelance. That said, if you have an opportunity, maybe talk it over with your financial advisor.
It’s a good idea to avoid taking out another large loan or making any major purchases (car, art, etc.) or even applying for new credit cards until your mortgage is signed, sealed and delivered. These are two really good reasons why:
1. These purchases or new debts can change your debt-to-income ratio (the percentage of your gross monthly income that goes toward paying recurring debt like car and student loans, rent, credit card bills). The general guideline is to shoot for a ratio that’s no more than 43% of your monthly gross income. If a new loan or purchase will put you beyond that scope, wait it out if you can.
2. Applying for credit cards and personal loans could lower your credit score because the applications can trigger hard inquiries into your credit and these could cause your score to drop … which is not great when you’re shopping for a mortgage.
Don’t let closing costs slip your mind. These are fees associated with buying a home and getting a mortgage, and they can easily add up to thousands of dollars.
New homebuyers can expect closing costs of around 2% to 5% of the home’s total price. For a $400,000 home, that’s anywhere from $8,000 to $20,000.
Keep in mind: Refinancers aren’t off the hook. According to Freddie Mac, average refinance closing costs are about $5,000. Some lenders will allow you to roll these costs into your mortgage when refinancing, instead of having you pay them upfront. But this move will add funds to your overall mortgage balance and therefore hike up the interest you pay over the course of your loan.
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.