FAQ

5 “do’s” before choosing a mortgage loan

So what are the crucial boxes you want to mark off your checklist before or during the process of applying for home financing? Here’s a roundup of to-do’s that are musts, per the pros.

“Do” #1: Review your credit carefully

Check your three free credit reports and scour the information. If you notice any inaccuracies or errors, work to have them corrected with each of the three credit bureaus: Experian, Equifax, and TransUnion. Once fixed, it should boost your credit score at least slightly.

“Do” #2: Up your credit score

Check your three-digit FICO score, which indicates your creditworthiness. A higher score (preferably in the 700s or higher) could land you a loan with better terms and a lower rate. Your bank or credit card may be able to provide free access to your current credit score.

You can raise your credit score by paying your bills in full and on time, not opening any new credit accounts and not closing any existing ones, asking your credit card issuer for an increased credit limit, and not using more than 30% of your available credit limit on credit cards.

“Do” #3: Research different loan options

Each loan type has its pros and cons. For example, conventional mortgage loans are usually offered by a wider variety of lenders. FHA loans can be easier to qualify for and may require as little as 3.5% down, but you’ll have to pay for mortgage insurance. VA and USDA loans require no down payment, but to be eligible you will need to be a veteran or active duty military member for the former or purchase in an approved rural area for the latter.

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“Do” #4: Get preapproved or at least prequalified

It’s smart to get preapproved for a mortgage loan well before formally applying for a loan. This means a lender has reviewed your income, credit score, and debts, and confirmed you qualify for a loan up to a certain amount. It provides a clearer idea of what you can afford and bolsters your position with sellers.

Getting preapproved can also help you identify any potential issues with your credit or financial situation early on.

Or, at minimum, you can get “prequalified” for a loan. This is a quicker and less thorough process whereby a lender reviews your basic financial information you provide, like your earnings and debts, and provides a rough idea of what you might get approved to borrow. But it’s less dependable at predicting that you’ll get approved than a preapproval is.

“Do” #5: Understand the fine print and your rights

Be sure you read and understand the terms and conditions of any mortgage documents before you sign them.

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5 “Don’ts” before choosing a mortgage loan

Likewise, it’s also imperative to sidestep common missteps many borrowers make. Here are 6 things to avoid.

“Don’t” #1: Don’t pick the loan only based on interest rate

Paying a lower rate will potentially mean forking over thousands less in overall interest over the life of your loan. It’s a big deal, of course. But choosing a loan solely based on the lowest interest rate quoted isn’t necessarily the best decision.

“Sometimes the lowest rate comes with the highest cost. Make sure you carefully compare loan programs as well as what that interest rate quoted might cost you if discount points or other fees are applied.

“Don’t” #2: Never assume your credit is good enough without checking first

Your credit scores and credit reports will be analyzed by the lender you apply with. But you don’t want to apply before verifying yourself that these are up to par. For a conventional mortgage, you typically need a FICO score of 620 or higher. An FHA loan with a 3.5% down payment usually requires a score of 580 or more, while an FHA loan with a 10% down payment can go as low as 500. VA loans do not have a set minimum score from the VA, but individual lenders may set their own requirements. USDA loans don’t have a specific minimum score, though most lenders prefer a score of 640 or higher.

“Don’t” #3: Do not rush the process

Yes, this process can feel stressful, and there are a lot of steps involved. But take a deep breath, relax, and don’t be in a hurry to get to the finish line as quickly as possible.

“Don’t” #4: Don’t be afraid to ask for help and guidance

You’re not in this alone. If you have questions about anything you don’t understand, you can always reach out to your assigned loan officer. Even if you feel in control and well-educated during the process, it’s a good idea to contact the team members and ask them for advice or insights.

“Don’t” #5: Avoid making major financial changes

Switching jobs, making a large purchase like buying a new car, losing your job, or getting divorced just prior to applying or closing on a mortgage loan are no-nos.

“These actions can affect your ability to qualify for the loan. Maintain your financial stability until the loan has been finalized.

It’s important to know why your credit scores dropped after paying off your debts. Your credit scores come from information from your credit reports. These reports come from each of the three nationwide consumer reporting agencies (NCRAs). The NCRAs — Equifax, TransUnion^® and Experian^® — receive information about your lines of credit from lenders and creditors. These include your personal loans, credit cards and auto and mortgage loans.

There are many formulas and scoring models used to calculate credit scores, and these are the factors most frequently used.

• Payment history
  Your payment history shows how you have repaid credit in the past. Certain behaviors, such as late or missed payments, can have a negative impact on your credit scores.
• Length of credit history
  Your credit reports track the amount of time your credit accounts have been active. A longer credit history can have a positive effect on your credit scores.
• Newer lines of credit
  Any recent credit accounts you have opened are also considered in your credit scores.
• Credit mix
  The different types of credit accounts, like loans and credit cards make up your credit mix. Having a diverse credit portfolio can have a favorable impact.
• Credit utilization ratio
  The amount of revolving credit used divided by the total revolving credit available is your credit utilization ratio. This can have an impact on your credit scores.

Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change — but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.

Nevertheless, scoring models generally evaluate the following types of information in your credit report:

• Have you paid your bills on time? Payment history typically is a significant factor. It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy, if that history is reflected on your credit report.
• What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score.
• How long is your credit history? Generally, models consider the length of your credit track record. An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
• Have you applied for new credit recently? Many scoring models consider whether you have applied for credit recently by looking at “inquiries” on your credit report when you apply for credit. If you have applied for too many new accounts recently, that may negatively affect your score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not counted.
• How many and what types of credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many models consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may negatively affect your credit score.

To improve your credit score under most models, concentrate on paying your bills on time, paying down outstanding balances, and not taking on new debt. It’s likely to take some time to improve your score significantly.

Mortgage rates can change from the day you apply for a loan to the day you close the transaction. If interest rates rise sharply during the application process, it can increase the borrower’s mortgage payment unexpectedly. Therefore, a lender can allow the borrower to “lock-in” the loan’s interest rate guaranteeing that rate for a specified time period, often 30 days. Rate can be locked for longer duration than 30 days but might come with a fee.