Steps to Take Before Applying for a Mortgage

Prospective homeowners should consider all the steps to securing the best possible mortgage terms.

NEW YORK – A home is the single biggest purchase most people will ever make. That’s perhaps become even more true in recent years when the cost of homes has increased dramatically.

The sticker price of a home may come as a shock to first-time buyers, but few homeowners purchase their homes in cash. Mortgages are a vital component of home ownership for the vast majority of buyers. Mortgages are loans obtained through the conveyance of property as security. When homeowners pay off their mortgages, the title of the property officially transfers to them from their lenders.

Though most homeowners utilize mortgages to buy their homes, that does not mean the process is the same for everyone. A host of factors affect mortgage terms, and there’s much prospective homeowners can do to secure the best agreement possible.

Recognize why a low interest rate is important. Mortgage interest rates have drawn considerable attention in recent years, as rising inflation has led to rates that have reached their highest point in more than a decade. Even a seemingly small difference in interest rates can save or cost homeowners thousands of dollars, if not tens of thousands, over the course of a loan. For example, the financial experts at Bankrate.com note that the difference between a 5.5% interest rate and a 6% interest rate on a $200,000 mortgage is roughly $64 per month. That might not seem like a lot, but over the course of a 30-year mortgage the borrower who gets the 6% loan will pay in excess of $23,000 more in interest than the borrower who secures the 5.5% loan. Recognition of the benefits of securing the lowest interest rate possible can motivate prospective buyers to do everything in their power to get a low rate.

“Depending on the value of the home, the interest rate can make a huge difference. In the beginning, you’re just paying the interest and it takes a while before you start paying on the principal,” said Gary Boatman, certified financial planner with Boatman Wealth Management, LLC. “You can reduce your cost if you save for a larger down payment as well. When you’re able to put down 10% to 20% of the home’s value, you need to borrow a lot less.”

Work on your credit score. So how can borrowers get the best possible rate? One way to go about it is to improve credit scores. Average mortgage interest rates vary significantly by credit score, with higher scores earning borrowers significantly lower rates. According to data from FICO, as of mid-February 2023 borrowers with a FICO score of 760+ earned an average interest rate of 6.06%, while those with scores between 620-639 secured an average rate of 7.65%. By bolstering their credit scores before applying for a mortgage, prospective homeowners can improve their standing in the eyes of mortgage lenders, which can potentially save them tens of thousands of dollars over the life of the loan.

“The number one way to get the best interest rate is to pay our bills on time,” said Boatman. “When your credit scores are not as good, you will pay more when you need a mortgage or a car loan. Make sure you have those credit cards paid off because that will impact your FICO score.”

“You also want to make sure you’re able to comfortably make the payment,” Boatman added. “Don’t buy a bigger house than you can afford. It’s not uncommon for someone to purchase a very large house but there’s no furniture in them because they can barely afford the house payment.”

Identify how much you want to spend. Prospective home buyers may be approved to borrow much more money than they think they will qualify for. That’s because lenders do not consider factors like utilities, insurance, day care or other expenses everyone has. That means it’s up to borrowers to determine how much those expenses will be, and how much they should be spending on a home. Though it might be tempting to borrow up to the amount lenders approve you for, in general it’s best to stay below that amount so you can capably meet all of your additional obligations.

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