Other websites allow you to see your VantageScore, though you should note this scoring model is used much less often than FICO by lenders and may differ from your FICO score by quite a few points. When it comes to the credit score needed for a mortgage, most conventional lenders consider to to be the minimum. Some government-backed loans will allow you to borrow with a credit score as low as , provided you meet certain other criteria.
However, the higher your score, the more affordable your loan will likely be. One of the best ways to improve your credit score is to make all your debt payments on time and in full. Finally, avoid making any major purchases on credit or open new lines of credit for a few months before you plan to apply for a mortgage, as this can negatively affect the average length of your credit history and the number of hard inquiries.
A few things to keep in mind include:. Conventional vs. There are two main types of mortgage loans. These loans tend to have fairly strict eligibility requirements and higher down payments. These loans are still borrowed through individual lenders, but the funds are insured by the federal government. This makes these loans much less risky to the banks providing them, allowing you to secure more flexible terms.
Fixed vs. Fixed-rate loans are generally a safe bet, as you know exactly how much your mortgage payment will be each month. Variable rates tend to be less expensive in the first few years of the loans. However, the rate will reset one or multiple times throughout the loan term according to the current market. That means your interest rate could increase in the future, causing your mortgage payments to become unaffordable. Shorter vs. Finally, consider how the length of your loan will impact the cost.
On one hand, a shorter loan of 15 or 20 years will allow you to pay off your loan faster and save money on interest charges. However, that also means the monthly payments will be much higher, stifling some of your cash flow. In fact, you may have to borrow a smaller amount in this scenario. On the other hand, you could extend the loan term out to 30 years or longer.
That would help make the monthly payments more affordable and even allow you to borrow more. But by increasing the number of years you spend paying back the loan, you also increase the amount of interest paid over time. Your finances are in good shape and you know how much you can borrow. Now here comes the real work. Income verification. Lenders will likely want to see tax returns for the last two years, as well as recent W-2 forms or pay stubs. Proof of assets. In addition to income, additional assets can help you secure a mortgage.
Expect to provide bank statements for checking and savings accounts, retirement accounts and other brokerage accounts from the past 60 days. List of liabilities. Lenders may also ask you to provide documentation related to outstanding debts, such as credit card balances, student loans or any existing home loans.
Additional paperwork. Depending on the lender, you may have to come up with some additional documentation. Accordingly, prequalification is a helpful starting point to determine what you can afford but carries no weight when you make offers.
A pre-approval, on the other hand, involves filling out a mortgage application and providing your Social Security number so that a lender can do a hard credit check. A hard credit check is triggered when you apply for a mortgage.
For this process, a lender pulls your credit report and credit score to assess your creditworthiness before deciding to lend you money. These checks are recorded on your credit report and can impact your credit score. By contrast, a soft credit check occurs when you pull your credit yourself, or when a credit card company or lender pre-approves you for an offer without your asking.
Soft credit checks do not impact your credit score. The reason for this is that, above all, a lender wants to ensure you can repay your loan. Lenders also use the provided information to calculate your debt-to-income DTI and loan-to-value LTV ratios, which are essential factors in determining the interest rate and ideal loan type.
All of this makes a pre-approval much more valuable than a prequalification. It means the lender has checked your credit and verified the documentation to approve a specific loan amount.
Final loan approval occurs when you have an appraisal done and the loan is applied to a property. Mortgage pre-approval letters are typically valid for 60 to 90 days. Lenders put an expiration date on these letters because your finances and credit profile could change. If you're just starting to think about buying a home and suspect you might have some difficulty getting a mortgage , going through the pre-approval process can help you identify credit issues—and potentially give you time to address them.
Seeking pre-approval six months to one year in advance of a serious home search puts you in a stronger position to improve your overall credit profile. You'll also have more time to save money for a down payment and closing costs. In many hot housing markets, sellers have an advantage because of intense buyer demand and a limited number of homes for sale; they may be less likely to consider offers without pre-approval letters. Applying for a mortgage can be exciting, nerve-wracking, and confusing.
Some online lenders can pre-approve you within hours, while other lenders can take several days. The timeline depends on the lender and the complexity of your finances. For starters, you'll fill out a mortgage application. You'll include your identifying information, as well as your Social Security number so that the lender can pull your credit.
Although mortgage credit checks count as a hard inquiry on your credit reports—and may impact your credit score—if you're shopping multiple lenders in a short timeframe usually 45 days for newer FICO scoring models , the combined credit checks count as a single inquiry.
Here's a sample of a uniform mortgage application. If you're applying with a spouse or other co-borrower whose income you need to qualify for the mortgage, both applicants will need to list financial and employment information.
There are eight main sections of a mortgage application. The specific loan product for which you're applying; the loan amount; terms, such as length of time to repay the loan amortization ; and the interest rate.
The address; legal description of the property; year built; whether the loan is for purchase, refinance, or new construction; and the intended type of residency: primary, secondary, or investment. Your identifying information, including full name, date of birth, Social Security number, years of school attended, marital status, number of dependents, and address history.
A listing of your base monthly income, as well as overtime, bonuses, commissions, net rental income if applicable , dividends or interest, and other types of monthly income such as child support or alimony. A list of all bank and credit union checking and savings accounts with current balance amounts, as well as life insurance, stocks, bonds, retirement savings, and mutual funds accounts and corresponding values. You need bank statements and investment account statements to prove that you have funds for the down payment and closing costs , as well as cash reserves.
The lender will fill in much of this information. An inventory of any judgments, liens, past bankruptcies or foreclosures, pending lawsuits, or delinquent debts. Most home sellers will be more willing to negotiate with those who have proof that they can obtain financing. A lender is required by law to provide you with a three-page document called a loan estimate within three business days of receiving your completed mortgage application.
It also specifies a maximum loan amount—based on your financial picture—to help you narrow down your home-buying budget. If you're pre-approved for a mortgage, your loan file will eventually transfer to a loan underwriter who will verify your documentation against your mortgage application. The underwriter will also ensure you meet the borrower guidelines for the specific loan program for which you're applying. Preparation and organization on your end will help the process go more smoothly.
Many loan products allow borrowers to use a financial gift from a relative toward the down payment. Otherwise, such an arrangement could increase your debt-to-income ratio and impact your final loan approval. Additionally, both you and the donor will have to provide bank statements to source the transfer of cash funds from one account to another. If you want to maximize your chances of getting a mortgage pre-approval, you need to know which factors lenders evaluate in your financial profile. They include:.
Your debt-to-income DTI ratio measures all of your monthly debts relative to your monthly income. Lenders add up debts such as auto loans, student loans, revolving charge accounts, and other lines of credit—plus the new mortgage payment—and then divide the sum by your gross monthly income to get a percentage. Having a lower DTI ratio can qualify you for a more competitive interest rate.
Before you buy a home, pay down as much debt as possible. Not only will you lower your DTI ratio, but you'll also show lenders that you can manage debt responsibly and pay bills on time. Another key metric that lenders use to evaluate you for a mortgage is your loan-to-value LTV ratio, which is calculated by dividing the loan amount by the home's value.
The LTV ratio formula is where your down payment comes into play. A down payment is an upfront sum of money you pay, in cash, to the seller at the closing table.
The higher your down payment, the lower your loan amount. And as a result, the lower your LTV ratio. To lower your LTV ratio, you either need to put more money down or buy a less expensive house.
Lenders will pull your credit reports from the three main reporting bureaus—Equifax, Experian, and Transunion. In addition to positive payment history, lenders analyze how much of your available credit you actively use, also known as credit utilization. It also shows lenders a responsible, consistent pattern of paying your bills and managing debt wisely. All of these items account for your FICO score, a credit score model used by many types of lenders including mortgage lenders.
If you have not opened credit cards or any traditional lines of credit—such as a car loan or student loan—you might have trouble getting a mortgage pre-approval. You can build your credit by opening a starter credit card with a low credit line limit and paying off your bill each month. Get your report from the three major credit bureaus: Equifax, Experian and TransUnion. Each is required to provide you with a free copy of your report once every 12 months.
Next, try to pay off high-interest debts and lower your overall level of debt as quickly as possible. Paying off credit cards and recurring loans before you buy a home will also free up more money for the down payment.
Understanding the major players will help you navigate the crowded lending field. Here are the most common types of home lenders:. Credit unions: These member-owned financial institutions often offer favorable interest rates to shareholders.
Correspondent lenders: Correspondent lenders are often local mortgage loan companies that have the resources to make your loan, but rely instead on a pipeline of other lenders, such as Chase, to whom they immediately sell your loan.
But these smaller financial institutions are often community-oriented and worth seeking out. Mutual savings banks: Another type of thrift institution, like savings and loans, mutual savings banks are locally focused and often competitive. Check if each lender you consider is registered in the state where you're shopping. Also, search the Better Business Bureau for unbiased reviews and information. Getting a mortgage preapproval letter before you start looking at houses will give you an edge when bidding against other buyers.
The letter shows the seller that you're a serious buyer whose loan is likely to close. It's evidence that a lender has evaluated your finances and figured out how much you can afford to borrow, and therefore how much house you can afford. Getting preapproved now will also save time later. When you're ready to make an offer on a home, lenders will already have the information they need to process your home loan. Social Security numbers for yourself and any co-borrowers.
Bank, savings, checking, investment account information. Outstanding debt obligations, including credit card, car loan, student loan and other balances. Two years of tax returns, W-2s and s.
Information about how much of a down payment you can make, and where the money is coming from. Get preapproved by more than one lender. Then you can compare Loan Estimate forms from each one to determine who offers you the best rates and terms. Start by searching for the best mortgage rates online. Keep in mind that the rate quote you see online is an estimate. Once you have several quotes in hand, compare costs and decide which one makes the most financial sense for you. Use your research as leverage to negotiate for the best mortgage rates possible.
The total interest you pay over the life of the loan is a big figure, and a low rate can save you thousands of dollars. Narrow your choices by asking for lender referrals from friends, family or your real estate agent, or by reading online reviews. How do you prefer to communicate with clients — email, text, phone calls or in person? How quickly do you respond to messages? How long are your turnaround times on preapproval, appraisal and closing? What lender fees will I be responsible for at closing?
Fees may include commission, loan origination, points, appraisal, credit report and application fees. Will you waive any of these fees or roll them into my mortgage? What are the down payment requirements? Also, check with your mortgage lender or broker if buying discount points to lower your rate makes sense.
This might be a good move if you plan on living in the home for a long time. For more on those fees, see Mortgage closing costs explained. Ask the lender to specify under what circumstances the earnest money cannot be returned, and if the answer is vague, keep shopping around. Always examine the fine print on your loan documents.
More from NerdWallet Compare online mortgage refinance lenders Compare mortgage rates Get preapproved for your mortgage. NerdWallet's star ratings for mortgage lenders are awarded based on our evaluation of the products and services each lender offers to consumers who are actively shopping for the best mortgage. The five key areas we evaluated include the variety of loan types and products offered, online conveniences, online mortgage rate information, and the rate spread and origination fee lenders reported in the latest available Home Mortgage Disclosure Act data.
To ensure consistency, our ratings are reviewed by multiple people on the NerdWallet Mortgages team.
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