Of all the things you have to do when shopping for a home, applying for a mortgage isn't one of the most fun. Not only is the mortgage process complex, but it can be difficult to tell if you're really getting a good deal on your loan. With that in mind, here are three things you can do that will help you prepare for the process and can put you in a position to save as much money as possible.
1. Check your credit score
As of Dec. 23, 2019, the average interest rate on a 30-year fixed-rate mortgage was 3.90%. While this isn't exactly the all-time low we saw a few years ago, it's still very low in a historical context. So it may seem like a great time to borrow money to buy a home.
Generally speaking, this is indeed true. However, it's important to mention that mortgage interest rates can vary dramatically based on your credit score.
If you have a top-tier FICO credit score, which we'll define as a 760 or higher, you can expect to pay about 3.42% on a 30-year mortgage. With a score in the 700-759 range (generally considered good credit), the average jumps to 3.64%. And while you can get a conventional mortgage with a FICO® Score as low as 620, you can expect to pay a much higher average interest rate of 5.01%. On a $200,000 loan, this translates to almost $67,000 in additional interest over the life of the loan as opposed to a top-tier borrower.
The point is that if you're planning to buy a home in the not-too-distant future, it pays to get an idea of where you stand. And if you're only a few points away from the next credit tier (you can view the tiers and current rates on myFICO.com), taking steps to boost your credit score can be one of the best investments you ever make. Check your credit score (be sure it's your actual FICO score), and take steps to maximize yours..
2. Get your documentation together
Real estate purchase contracts often have a 30- or 45-day closing period, and while this may sound like a long time if you've never been through the process, believe me -- it's not.
In order to make sure your mortgage's approval and underwriting process goes as smoothly as possible, it's a good idea to gather the documentation you're likely to need before you apply. While this isn't an exhaustive list, here's a quick checklist of what you should plan to need:
- Your last two years' tax returns
- Your W-2s (or 1099s) for the past two years
- Your bank statements for the past few months (including brokerage and retirement accounts)
- A copy of your driver's license and Social Security card
- Contact information for your current employer
- Contact information for your current landlord (if applicable)
- Pay stubs from the past 30 days
If you're applying for your mortgage online, it's a smart idea to go ahead and scan these documents so you have electronic copies handy.
3. Shop around
One of the most common mistakes people make when shopping for a home is to apply with just one lender, and simply accept the first rate they're offered. Don't make this mistake. It's a smart idea to get preapproved with at least a few different lenders to compare interest rates.
Here's why this is important. While you aren't likely to find a big difference in rates between lenders, you are likely to discover small differences in interest rates that can make a big difference over time. For example, let's say that you apply with two lenders and are offered $250,000 30-year mortgages with APRs of 3.85% and 3.9%. This may sound like essentially the same thing, but you might be surprised to learn that the lower rate will save you more than $2,500 over the 30-year repayment period. I'd say that's worth the time it takes to fill out a couple of extra mortgage applications. In today's world of online mortgage applications, the extra time commitment may be much smaller than you think.
And don't worry about hurting your credit by filling out a bunch of mortgage preapproval applications. There's a rule in the FICO credit scoring formula that is designed to encourage rate-shopping. As long as all of your applications take place within a two-week shopping period, it will count as a single credit inquiry.
The mortgage process doesn't have to be stressful and uncertain
The bottom line is that the mortgage process can seem stressful and you might not know if you're really getting the best deal, but doing these three things before you apply for your next mortgage can help move the process along quickly and can save you thousands of dollars in the long run.
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