Buying a home can be one of the most exciting or stressful times in your life. It is also likely the most expensive purchase you will make. Unless your cash flow is extensive, you’ll need to take out a home loan from a bank or credit union to help you finance the purchase you’ve been dreaming of.
Whether you’re applying for a home loan for the first time or you’re an experienced homeowner, there are a few things to keep in mind before applying for a mortgage loan. Keep the buying process simple by following these seven tips from Members Exchange Credit Union:
Tips For Getting a Mortgage Loan in Jackson, MS
1. Start with Your Credit Report
Before you get too deep into the application process, it’s a good idea to take a step back and check your credit reports first. The health of your credit will play a big part in getting a good deal on a home loan or even getting approved at all. The easiest way to get on top of your credit is to pay all of your bills on time, every time. Late payments may negatively affect your score and ultimately your interest rate. Typically, payment history accounts for 35% of your credit score. The other 30% is attributed to the amount of debt you owe in relation to the total amount of credit extended to you.
Gather your own credit data by pulling your report from major credit bureaus like Experian, Equifax, and TransUnion. This can be done by visiting the federally-authorized annualcreditreport.com which provides free credit reports once per year. Once you have your scores, make sure that there are no open accounts that could indicate identity theft and signal a lower credit score. Incorrect information can be disputed, and the bureau must respond within 30 days. Also, look out for any delinquent payments, bankruptcy, and too many credit inquiries and work to remedy what you can before applying.
Most conventional lenders consider 620-640 to be the minimum score needed for a mortgage while some government-backed loans will allow you to borrow with a score as low as 500, provided you meet the necessary criteria.
Avoid making any major purchases on credit or open a new line of credit for a few months before and after applying for a mortgage loan as this can negatively affect your chances. Also, keep in mind that even after the loan goes through, it’s important to maintain a good payment history so that your future loan requirements can be met.
2. Calculate Your Expenses
Once you’ve found your dream home and have kept an eye on your credit score, it’s wise to calculate your expenses to make sure you can afford it. Experts suggest using the 28/36 rule to estimate how much money you can spend on a home. Taking into account your debt-to-income ratio, or the total amount of your gross monthly income that’s allocated to paying off debt each month can help you determine this. Ideally, your “front-end” DTI which includes mortgage-related expenses, should be below 28% while your “back-end” ratio which includes the mortgage and all other debt obligations should be no more than 43% of your monthly expenses although 36% is preferred.
If your DTI is too high, you’ll need to work on reducing or eliminating some existing debt before applying for a mortgage loan. This does not include interest on the loan, homeowners insurance, property taxes, and potentially homeowners association fees.
3. Decide What Type of Loan You Need
It’s important to know the differences in loan types so you get the best one to suit your needs:
- Conventional vs. Government-Backed – There are two main types of mortgage loans. Conventional loans are provided by a credit union, private bank, or online lender and tend to have more strict eligibility requirements or membership requirements. If your credit is not in great shape and you haven’t saved up for a down payment, a government-backed mortgage loan like an FHA or VA loan might be your best option. These loans are less risky as they are insured by the federal government and may have more flexible terms.
- Fixed vs. Variable Interest Rate – Deciding whether or not to choose a fixed rate or variable rate is also something to consider. Fixed-rate loans are helpful in knowing exactly what you will be paying each month while variable rates tend to be less expensive during the first few years of the loan. The rate will reset depending on the market which may result in too expensive of payment in the future.
- Shorter vs. Longer-Term – Considering the length of your loan is the last concern. A shorter loan of up to 20 years will allow you to pay off your loan faster and save money on interest; however, the monthly payments will be much higher. This could result in having to borrow more money in the long run. Extending the payments out for 30 years will shorten your note but result in more interest being paid overtime.
4. Set Aside a Large Down Payment
The larger your down payment, the wider your options. As mentioned, it’s important to be realistic about what you can afford. Within the framework of your established budget, the more you put down, the better your terms. If you can not put any money down, there are still options for you including government-backed mortgage loans like the ones listed above.
5. Get Pre-Approved
It can be exciting when you finally have your finances together and are ready to pull the application trigger. Before doing so, take some extra pressure off of yourself by getting preapproved for a mortgage. When doing so, a lender will take a look at your personal details including credit score and income, and assets to give you an estimate of how much you can borrow. Not only does this help give you peace of mind, but it also gives you a competitive edge amongst other interested home buyers. A seller knows there’s more than a chance that you can secure financing right now.
Getting pre-approved also allows you to shop for homes with a more precise number in mind while your mortgage application is being evaluated. Once this is complete and you are ready to be under contract, you will need to submit an official mortgage application and go through the full underwriting process before getting the official loan approval.
6. Prepare for Setbacks
“Not now” doesn’t mean “never”. Homeownership is just not a realistic option for everyone all the time, despite what it may look like or what “once-in-a-lifetime” offerings you find in the market. If you fall in this category, don’t despair. Your financial circumstances could change, and it’s important that we learn from the past. When it comes to major purchases like a home, timing is crucial.
7. Refinancing and Second Mortgages
There may come a time when you can get a better mortgage. Perhaps interest rates have changed or your credit has improved. Refinancing a mortgage is a powerful move when done for the right reasons. A second mortgage also called a home equity loan or home equity line of credit, allows you to borrow against the value of your home. You may be able to access a large line of credit at an attractive rate, but it comes with some pitfalls. You’re adding to your overall debt burden, which can make you more vulnerable during difficult financial times.
Apply For a Mortgage Loan at Members Exchange Credit Union | Jackson, MS
Securing a mortgage is one of the many steps in the overall home buying process, but it is easily one of the most important ones. Be sure to take time to evaluate your options as you will be paying on your loan for some time. Members Exchange Credit Union in Jackson, MS is here to help you acquire your mortgage loan every step of the way. From getting your finances ready to getting you pre-approved, we are prepared to work with you to ensure a smooth transition to homeownership. To learn more about our application process or apply for a mortgage loan, reach out to our financial advisors at MECU and get started today!