Month: September 2015

In these days of ever-watchful lenders, you, as a consumer, can put yourself in the best possible position to be approved for a mortgage by taking a few simple, commonsense steps before you start your home search.

The first step is ensuring you are paying your bills on time. As simple as this sounds, lenders find it extremely important to know that you’re capable of paying on your current debt before they permit you to saddle yourself with even more debt – perhaps more than you can handle.

Second, if you aren’t doing so already, control the amount of your current debt – particularly revolving debt such as credit card balances. Pay special attention to the ratio of your balance to your limit, and try to keep this below 30%.

For example, if you have a credit card with a $500 limit, try to keep the balance under $150. If the ratio goes too high, even on lower-limit cards, it looks to the credit bureaus as though you are about to reach the full limit of the card, which tends to drive down your credit score.

Having multiple cards that are at or close to their limits may start impacting the number of mortgage programs, as well as the dollar amount, you are able to qualify for.

It’s always a good idea to either pull your own credit – which you should be doing regularly anyway – or ask your mortgage professional to pull it.

It’s worth the small charge, and here’s why: if it turns out that there are unexpected items on your credit report that need to be addressed and/or removed, this action will give you the opportunity to take these steps before starting the approval process.

But don’t leave it too long; you can expect that any type of action to correct a credit report will take a minimum of 30 days to affect your report.

When you’re shopping for a mortgage, you should at least consider the 15-year option. The payments will be higher than on a 30-year mortgage, but the long-term benefits are considerable.

First, interest rates are typically lower on 15-year mortgages than on their 30-year counterparts. A 0.25% difference in interest rates may sound minimal, but taken over 180 payments – the number of payments you’d make on a 15-year mortgage – it can add up to a huge difference.

Also, as you are paying on the mortgage for only 15 years, the total interest expense (money that all goes to the lender) will be much less.

For example, if you were to borrow $160,000 for 30 years at 4.25% or 15 years at 4.00%, your payments would be $787.10 and $1,183.50 respectively. The 15-year monthly payment is significantly higher, but thinking long term, your payments would total $283,356 for the 30-year mortgage compared to $213,030 for the 15-year mortgage.

This is a saving of $70,326, making the shorter term well worth it – providing, of course, you can manage the higher payments for the 15-year duration of the loan.

Another option is to take the 30-year mortgage and pay down the principal each month. Even with a 4.25% rate, if you were to make an extra 1/12 payment toward the principal each month ($65.59 on the 30-year mortgage as described above), you would shave off seven years at the end of the mortgage and save $19,903.59 in interest.

Your mortgage professional will help you select the option that’s best for you.