Understanding what you need to gather to prequalify for a mortgage is the first step to moving into your new home. What seems so hard to achieve can become quite simple once you get a few things in place.
Know Your Credit Score
Firstly, knowing your credit score can help you in several ways. The earlier you get started preparing for a mortgage, the better chance you will have at getting everything aligned to purchase the home of your dreams. The three national agencies reporting credit, TransUnion, Experian, and Equifax, have to give you a free report yearly, and you should take advantage of this. In short, go to annualcreditreport.com to request your free report. Scores typically range from 300-850. The better the score, the better shot you have at a reasonable interest rate and mortgage.
Save for a Down Payment
The absolute minimum down payment required by an official loan is about 3%. Of course, this means that even with an affordable home valued at $60,000, you are looking at paying $1,800. Conventional loans require 20%, and if you do not have that, you will need PMI insurance of about 1% on the outstanding loan. This private mortgage insurance makes sure your lender receives payment should you default. Certainly, the larger the down payment you can save, the better chances of getting prequalified for the home you want.
Understand Debt-to-income Ratio
There is a simple formula to help you understand what your debt-to-income ratio is. Consider monthly payments such as student loans, leases, credit cards, and an estimated mortgage payment as A. A/B is the formula you use, and B is your annual salary divided by 12 to get your gross income per month. If your monthly income is $6,000 and your monthly bills are $2,000, your debt-to-income would be 33%.
