The majority of potential home buyers wait until they’re ready to purchase before they talk to a mortgage lender. After all, why bother digging up financial statements and filling out a bunch of paperwork if you’re not going to buy right away? If buying a home is one of your long-term goals, however, you could be doing yourself a disservice by not talking to a lender sooner rather than later. The goal of any good mortgage lender is to help you get “mortgage-ready,” which means helping you qualify for the best mortgage possible, with financial terms and a monthly payment that makes sense for you and your budget. Here, realtor.com discusses five reasons why you should talk to a lender, even if you’re not quite ready to buy.
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You may be closer to buying a home than you think
Home buyers often hesitate to meet with a lender because they think they’re not financially ready. They might think their credit score is too low, or they don’t have enough saved for a down payment. They might be surprised, though. Lenders sometimes can show a prospective home buyer a home financing option or solution they didn’t even know about. From a credit score, monthly payment, and down payment perspective, many potential buyers are closer to owning a home than they realize.
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You don’t need perfect credit to buy a home
Many people put off buying a home until they have a good credit score (typically 700 or higher). However, a credit score of 620 is generally considered the minimum to qualify for a mortgage, with many lenders working with applicants who have lower credit scores. Federal Housing Administration loans are available to applicants with scores as low as 580, and your lender may be able to connect you with other options.
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A lender can help you create an action plan for improving your credit
If your credit score is on the lower end, you may want to take some steps to improve your score so you can qualify for a better interest rate. Lenders sometimes begin working with prospective home buyers one to two years in advance, making them aware of certain credit items that need to be addressed—like how to boost your credit score to obtain the best rate and terms, or the best way to handle an account that has gone to collections. If a buyer’s credit score needs improvement, or if they have an issue documenting necessary income or assets needed to qualify, a seasoned mortgage lender can help formulate a plan to get that same buyer in a better position to buy. To formulate an action plan, lenders will typically:
Do a soft credit check: This is a credit inquiry that doesn’t hurt your credit score; it gives your potential lender a sense of where you stand today.
Review your financial statements: Examining bank statements and any investment or retirement accounts you have helps your lender know what your available income and assets are.
Ask you about your budget, income and financial history: Don’t be shy or embarrassed when it comes to disclosing this information to your lender, whose goal is to work with you. Let your lender know if you had a financial rough patch, got behind on a bill or co-signed on a loan for your brother-in-law that you really regret. Then your lender can develop a plan to help you pay down debts that are dragging down your credit score.
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A lender can specify what you need for a down payment
Lenders are able to clarify exactly how much you’ll need to save for a down payment. For example, FHA loans require a down payment of at least 3.5 percent. You may want to make a larger down payment to bring down your monthly payment or to offset negative credit items. A larger down payment of 25 percent to 30 percent lowers the lender’s financial risk and makes your application more appealing. But a high down payment isn’t a requirement to qualify for a mortgage. Depending on your situation, you may qualify for a down payment assistance program. Many of these programs are localized, so sit down with a lender in your area to find out what you qualify for in your city and state. Then your lender can go over the pros and cons of local down payment assistance programs to help you make an informed decision.
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You’ll know what to expect
Sitting down with a lender can give first-time buyers an understanding of the mortgage underwriting process, how long it takes and what documentation they will need to have prepared. With interest rates rising and many housing markets shifting, education and preparedness are more important than ever.
Talking with a lender can help demystify the lending process, giving you time to get “mortgage-ready” so you can purchase your dream home whenever the opportunity presents itself.
