Most potential home buyers wait to talk to a mortgage lender until they’re ready to buy. Makes sense, right? Why bother digging up your 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, you may 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.” This means getting you and your finances in order so you can qualify for the best mortgage possible, with financial terms and a monthly payment that make sense for you and your budget.
So even if buying a home is a few years away, sitting down with a mortgage lender today can help get you on the path to homeownership. Here are five reasons why you should talk to a lender, even if you’re not quite ready to buy.
1. You may be closer to buying a home than you think
One reason home buyers may hesitate to meet with a lender is that they think they aren’t financially ready. They may think their credit score is too low, or they don’t have enough saved up for a down payment.
They might be surprised, though.
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“Every day, I’m able to show a prospective home buyer a home financing option or solution they didn’t know about,” says Gaurav Mahajan, vice president of residential lending at Draper and Kramer Mortgage Corp. with the firm’s Rockville, MD branch office. “From a credit score, monthly payment, and down payment perspective, many potential buyers are closer to owning a home than they realize.”
2. 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 a score of 700 or higher). According to Mahajan, a credit score of 620 is generally considered the minimum to qualify for a mortgage, but many lenders work with applicants with 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.
3. 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 credit so you can qualify for a better interest rate.
“I often begin working with prospective home buyers one to two years in advance,” says Heather McRae, senior loan officer at Chicago Financial Services, in Chicago. “If there are [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—I guide people on how to best tackle these items.”
Michael Press of Penrith Home Loans in Seattle agrees. “If a buyer’s credit score needs improvement or perhaps 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,” he says.
To formulate an action plan, lenders will typically:
- Do a “soft” credit check—A soft credit check is a credit inquiry that doesn’t hurt your credit score. This gives your potential lender a sense of where you stand today.
- Review your financial statements—Reviewing your bank statements and any investment or retirement accounts you have helps your lender know your available income and assets.
- 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. 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, let your lender know.
Once your potential lender knows the ins and outs of your financial situation, it can develop a plan to help you pay down debts that are dragging down your credit score.
4. A lender can specify what you need for a down payment
Lenders can also clarify exactly how much you need to save for a down payment. FHA loans, for example, require a down payment of at least 3.5%. 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% to 30% lowers the lender’s financial risk, making your application more appealing.
A high down payment isn’t a requirement to qualify for a mortgage, though. Depending on your situation, you may qualify for a down payment assistance program. Many of these programs are localized, so to find out what you qualify for in your city and state, you should sit down with a lender in your area. For example, McRae reviews the pros and cons of local down payment assistance programs with her prospective home buyers to help them make an informed decision.
5. You’ll know what to expect
The mortgage application process is lengthy, even for experienced home buyers. For first-time buyers, sitting down with a lender can give them 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,” says Press.
Sitting down 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.
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Melinda Sineriz is a writer living in Bakersfield, CA. She writes about personal finance and real estate for several websites and businesses.