If you’re getting ready to buy a house — whether it’s your first mortgage or your next home loan — it’s never too early to lay the groundwork for the best mortgage you can qualify for.
Here’s how to get the most affordable mortgage when you’re facing the 2023 headwinds of higher home loan interest rates and rising house prices.
Lower mortgage rates ahead?
Home affordability has taken a hit as the supply of houses remains tight and mortgage rates hover at 7% and above. But conditions may be improving in the coming months.
“If mortgage rates shift lower in 2024 as we anticipate, the combination of rising inventory levels and lower rates should lead to stronger demand for buying a home,” Edward Seiler, Mortgage Bankers Association associate vice president of housing economics, said in a late September analysis.
Is it harder to qualify for a mortgage in 2023?
Mortgage providers have been tightening their eligibility standards in 2023 as “lenders reduce staffing and simplify their product offerings to reduce costs and raise profitability,” said Joel Kan, vice president and deputy chief economist for the MBA, in a recent report.
That means you want your loan application to stand out during the underwriting process. Review your credit history, know how much house you really need, and pay down credit card and other monthly debt to sweeten your credit score. If student loan debt is an issue, know your forgiveness, repayment, or refinance options.
A higher credit score will enhance your chances of mortgage approval and smooth your way in the home buying process.
Get mortgage lenders to compete for your business
It’s easy to fall into a mindset that a lender is doing a favor by making you a loan offer. Look, they’re in business. They need to make loans. If you are a qualified, creditworthy buyer with a steady income, lenders will compete for your application.
And that’s exactly what you want them to do. For that to happen, you’ve got to get in front of several worthy contenders. That could mean talking to the bank that has your checking account, the credit union down the street, and a couple of online lenders. Throw in a lender a friend or family member recommended.
Understanding your mortgage loan options
There are many types of mortgage loans. It’s not your job to know them all. The best mortgage lenders will hunt down your available options and tell you about them. You may want to consider the following:
- A fixed-interest-rate loan or an adjustable-rate mortgage.
- The term of the loan. Do you want a 30-year mortgage and a lower payment or a 15-year term to accelerate your equity?
Also ask each lender what your loan choices are for the down payment you can afford. And if you’re a first-time home buyer, you may have even more options available to you.
Prequalification vs. preapproval
To get a good read on where your home buying power stands, ask a mortgage lender for a prequalification. A prequal is a lender’s initial impression of your creditworthiness. You’ll get an early look at what you might be able to afford and how much your monthly payment might be — but it’s an educated guess, at best.
Before you start seriously house hunting, you’ll want a full-fledged mortgage preapproval. Your full credit report will be pulled, and you’ll have a better idea of what kind of interest rate you’ll qualify for. However, it’s not a final decision. You’ll get that when you have a seller accept your offer on a house and submit a full application to the lender.
You only need one mortgage preapproval before shopping for a house. So, remember those lenders that you want competing for your business? Pick one that gave you an early prequalification and ask for a preapproval so you can begin house hunting.
Find your house
Now you’re ready to find that house. A good buyer’s real estate agent can guide you through the process, especially when it comes to making an offer. They can pull comparable sales in the neighborhood to make sure your offer is fair to the buyer, and you.
Once you’ve found one or two contenders for your next address — with a mortgage preapproval in hand, you can make an offer.
Select an offer and apply
When your written offer is accepted by the seller, you’ll be tempted to run back to the lender who gave you the preapproval and get the deal done. But you want the best mortgage you can qualify for and that means other lenders need to put in a bid for your loan.
Make an official application with two or three of your lender finalists. Ask for a loan proposal with zero discount points. It will make the math much easier to compare each lender’s offer.
The lenders will issue loan offers with a mortgage rate, an estimate of your monthly payment and the total interest you’ll pay over the life of the loan.
Now you can make a well-informed decision and pick the best offer.
The documents you’ll need to get a mortgage
Much of the mortgage loan application process is a paper chase. Some of the documents you’ll need to gather include:
- Identification docs, such as driver’s license and Social Security number.
- Employment history. Proof of income for the past two years. Things like W-2s, 1099s, and pay stubs.
- Bank statements for your financial accounts, including checking, savings, retirement accounts, and investments.
- Personal and business federal tax returns.
- Legal documents related to alimony or child support.
- If you’re self-employed, you’ll need to provide profit and loss statements.
- Paperwork about any financial gifts you’ve received.
- Copy of the signed purchase agreement for the house you’re buying.
Closing
It will take a few weeks for the loan to go through the lender’s underwriting process. Following official loan approval, you can start packing your boxes and making preparations for the move.
Three days before signing, you’ll get an official Closing Disclosure form detailing all of the final numbers. At closing, you’ll sign a small hill of paperwork and get the keys to your new place.