Check your credit bureau report. It is imperative that you find out what your credit looks like at least six months before applying for a mortgage loan. Websites such as AnnualCreditReport.com and CreditReport.com are great places to start. Make sure you check your credit report thoroughly for errors, and dispute anything that is not accurate. Taking the time to do this will help boost your score, allowing you to lock into the best interest rates on the market.
Organize your paperwork. Since there are no longer light documentation loans, it is essential that you get your paperwork in order.
All lenders require the last two years of W2s, last 30 days of pay stubs, and the last 60 days of all financial statements from your accounts. If you are a self-employed borrower you need your last two years of tax returns, and a CPA letter or business license confirming that you’ve been self-employed for the last two years. There will be more paperwork after you choose your lender such as a borrower’s authorization (allows the lender to verify rent, employment, deposits, etc.), and Form 4506-T (allows lender to request tax returns from the IRS to check for discrepancies). The faster you get all of your documentation in for underwriting, the faster you can close on your loan.
Determine the type of mortgage loan you want to apply for. If you are working with a minimal down payment, FHA would be the sensible route. FHA loans only require 3.5% down, and even though there is a lot of extra paper work involved, it’s the only way to apply for a mortgage loan without at least a 5% down payment.
The only exception is the VA loan, which offers 100% financing solely to veterans.
Another consideration for loan type is if you need a fixed rate or an adjustable rate. If you feel that you might only be in the home for a couple of years, it might be best to go with the lower adjustable rate. The most popular is a 5/1 ARM, which is fixed for five years and adjusts after that time. If this is your long-term dream home, consider a 30-year fixed, because the rate will not change over the life of your loan.
Choose a lender that you trust. Mortgage loan officers will do just about anything to get your business, because the majority of them operate on 100% commission. From being a loan officer for eight years at a popular banking institution, I know how they think. It is their job to make their company look most appealing, and they are experts in sales. This gives you an advantage. You can freely compare loan options with several different lenders to get the best pricing and terms. If you are super savvy, you’ll not only be able to apply for a mortgage loan, but you’ll have plenty of options to choose from.
Tip: before checking with the smaller mortgage firms, check with your personal bank and credit unions. They might have discounted pricing available.
Warning: if you’re a self-employed borrower, you need to know that loan approval is based on your adjusted gross income. If you write off all of your expenses, you’ll find it difficult or impossible to get approved for a home loan.