If you're planning to buy a new house or refinance your current loan anytime in the near future, you'll most likely have to go through the mortgage application process.
Before you do, here are three things you may not know that could help the process go more smoothly and possibly save you some money.
1. Many Of The Mortgage "Rules" Can Be Bent
There are a few key areas that a lender will evaluate when you apply for a mortgage, namely, your credit, income, employment history, savings, and debts. And many lenders have specific guidelines in each category. For instance, two common requirements are that your total mortgage payment is less than 28% of your income and your mortgage payment plus the rest of your debts combine to less than 36% of your income.
What many people don't realize is that lenders will make exceptions to these "rules," especially if some of your qualifications are particularly strong. If your debts are a little high but your credit score and employment history are rock-solid, then there's still a good chance you'll get approved. In fact, the Fannie Mae lending guidelines provide underwriting guidelines for debt-to-income ratios as high as 45%.
If your application is a bit weak in one area, don't let it keep you from applying. Talk to a mortgage professional—you may be surprised by what they have to say about your chances of approval.
2. Credit Might Not Be As Much Of An Issue As You Think
It's a common misconception that you have to have a fantastic credit score to qualify for a mortgage. And this is completely understandable, as the average approved borrower currently has a FICO credit score of 729—well within the range of "good" credit.
However, lenders will approve much lower scores so long as your other qualifications are solid. You can actually qualify for a conventional loan with a FICO score as low as 620, and you can get an FHA loan with just 3.5% down with a score as low as 580. And if you have a larger down payment, you may be able to obtain an FHA loan with an even lower score than that.
If you're barely above the credit score cutoff, your other qualifications play a huge role in whether or not you'll get approved. For example, if your credit score is on the low end (and still over the minimum), but you have a solid employment history and earn more than enough to cover the mortgage payment and your other bills, then you shouldn't have too much of an issue.
3. Shopping Around Could Save You A Bundle
Entirely too many people simply accept the first mortgage offered to them. They'll either deal with their real estate agent's "mortgage guy" or simply apply for a loan with their own bank.
It's silly not to shop around for a loan. Not only could it save you thousands of dollars, but it should have no impact whatsoever on your credit score, despite what many people think. It's true that when banks or other lenders pull your credit information, it shows up on your credit report and can cause your score to drop by a few points. However, all of the mortgage inquiries that show up during a "normal shopping period" count as one single inquiry. This shopping period varies between 14 and 45 days depending on which version of the FICO score your lender is using, so as long as you do all your shopping within a two-week period, it doesn't matter whether you apply with one mortgage lender, five lenders, or a dozen; the impact on your credit score will be exactly the same.
And the impact of a small difference in rates can be bigger than you may think. Let's say you want to obtain a $250,000 30-year mortgage, and the first lender you talk to quotes you a rate of 4.125%. After you shop around for rates, it turns out the best you can find is 4%. While these two rates sound extremely close, consider that the $18 difference in monthly payments adds up to $6,500 in savings over the life of a loan.
It's Better To Over-Prepare
The bottom line here is that the more you know about the mortgage process, the easier it will be, and the better deal you're likely to get. Being armed with the facts listed here is a great start, but any time you invest, learning more about the process will be well worth it.