Thoughts on Preparing for a Mortgage Application

One of the nicest aspects of our very active local real estate market in recent years has been the growing number of first time buyers.

With so many people going through the home purchasing process for the first time, I thought it would be a good idea to offer some general tips for that all-important initial stage of applying for a home loan.

The first thing to emphasize, however, is that everyone's situation is, at least to some extent, unique and it's therefore essential to engage with a top mortgage professional for individually tailored guidance as early as possible in the process. We have great relationships with all the top people in the area, so please feel free to contact us at any time for an informal introduction.

For today, however, let's focus on some great general tips that apply to more or less anyone making a mortgage application.

By far the best piece of advice I can give is to get pre-approved for a home loan before you actually start to look for a property. The reason I say this is essentially two-fold. First and foremost, this will set the stage in terms of what you can comfortably afford to buy, thus focusing your home search and avoiding any disappointments down the line. Secondly, sellers will take buyers who are pre-approved more seriously, and this can sometimes be the determining factor in securing a home, all other things being equal.

Having said that, there is still some confusion among buyers between pre-approval and pre-qualification. They are not the same. Pre-qualification is an indication from a lender that, on provision of some basic financial information about you, outlines what mortgage amount you should qualify for. But it is not a confirmation that you will be approved for a home loan. Pre-qualification is still useful at a very early stage, in that it provides an indicator of what you are likely to be able to afford, but pre-approval, on the other hand, involves a formal mortgage application and a far more thorough analysis of your circumstances, including your current credit rating. As a result, the lender can provide you with specific approval for a mortgage amount and exactly what interest will be payable.

I just mentioned credit rating and, in today's mortgage market, this is even more important, with very strict debt-to-income ratios in operation. If you're looking to apply for a mortgage in the foreseeable future, it's absolutely essential to monitor your credit rating and do nothing that is likely to reduce it in any way. Even if you feel you can afford a new car, taking out a loan for this around the time of house purchase is not a good idea at all, as it can negatively impact your credit rating and greatly increase your actual borrowings, and thus worsen your debt-to-income ratio. It's superb advice to reduce the overall amount you borrow, as much as is possible. Also don't make the mistake of starting to borrow big once your loan is pre-approved as your lender will carry out a second credit check before the mortgage is provided. Remember also that the better your credit rating, the less interest you're likely to pay.

Going back to affordability, if you're looking to own a first home, you need to remember that home ownership does mean that you will have a range of expenses that don't apply when you are renting, especially in terms of budgeting for home maintenance, property taxes etc. Your mortgage professional can guide you through all the extra expenses and help you to establish a comfortably affordable level in your own situation. Affordability should also take account of other expenses that relate to your interests/life goals etc. Those are things only you will know, but they should certainly form part of the equation.

Another thing I've observed over the years is that sometimes people want to move fast on a mortgage application, but don't have all the necessary paperwork on hand that a loan officer will need. As you might expect, there is a pretty extensive paperwork requirement, including pay stubs, bank statements, tax returns, details of investments, credit card balances, details of other types of loan, etc., etc. Some people will have all this information already easily available in a folder, but some won't. If you more accurately fit the latter category, I strongly recommend that you compile a folder of all paperwork that helps to build a complete picture of your income and outgoings. Once again, your mortgage professional will be able to identify all specific needs in this regard.

With mortgage rates still close to the lowest levels in 2017, it's certainly a great time to make the leap from renting to purchasing a home of your own and I hope these pointers will help to make the whole transition a little easier and more straightforward.

Dominic Nicoli