When should you
apply for a home loan?
If you are thinking about buying a home, you’ve probably wondered at what point should you actually apply for a home loan. The process of obtaining a residential mortgage can seem complex and stressful, especially if you’ve never been through it before. But fear not — it’s doesn’t have to be a painful experience if you have the right guidance.
The realities of the Los Angeles residential real estate market
Shopping for a new home can be fun, but also nerve-wracking. Here in the Los Angeles area, home inventory – the number of homes for sale at any given time – is relatively low. The supply has fluctuated in the 3-month to 6-month range for the past few years. A 6-month supply represents a balanced market, and lower supply levels are considered a seller’s market. As a result, there can be intense competition between buyers for new listings, especially for homes located in desirable neighborhoods.
In order to compete effectively for a home, it’s important to present a compelling offer to the seller. Aside from offering the right price – something your real estate agent can help you determine – it also means assuring the seller that you can successfully complete the transaction on a timely basis.
Purchasing a house with cash is the ultimate weapon in the home buying arms race, and cash buyers often win these battles. But failing that, the next best option is accompanying your offer with a substantial earnest money deposit and documentation that you can secure the necessary financing to purchase the home.
Get a mortgage pre-approval before you start shopping for a home
While applying and getting approved for a mortgage before making an offer might seem like a good strategy, application documents are only good for sixty days. Plus, a home loan is approved based on a specific property. For these reasons, you shouldn’t actually apply for a home loan until after your offer has been accepted by the seller.
Instead, applying for mortgage pre-approval is the way to go. A mortgage lender will analyze your income, debts, financial position, and credit history to determine what mortgage programs you qualify for, approximately how much you are able to borrow, and any eligibility requirements for the homes you can purchase.
Is your credit ready to get you pre-approved?
In order to get pre-approved for a mortgage, you need to have a relatively clean credit history. In general, this means that any significant blemishes – like a charge-off, foreclosure, or bankruptcy — must be well in your past, and any late or collection accounts need to be brought current.
It may also be advisable for you to work towards removing negative information from your credit report. Raising your credit score can help you qualify for more favorable loan terms, particularly a lower interest rate. A mortgage banker can best advise you as to what steps you can and should take to buff up your credit report. This process can take some time, so it’s never too early to start.
Finally, don’t close any credit card accounts or make early pay offs of any installment loans shortly before you plan to buy a home. Access to credit—those open credit cards and installment loans—help improve your credit score. However, make sure the balance on each of your cards is no more than 20% of the credit limit, and of course, make all your payments on time — recent late payments can derail the entire process. And you shouldn’t try to get any new credit when you’re planning to apply for a home loan.
Start gathering the documents you need to apply for a home loan
There’s another important thing to do to get prepared to apply for a home loan. You’ll need to provide fairly extensive documentation of your financial standing to support your mortgage application. This includes evidence of your income and assets, as well as your debts.
Typically, lenders will want to see pay stubs, bank statements, retirement fund or other investment statements, verification of income from rental property, etc. covering the period a few months prior to the date you apply for a home loan. You may also be asked to show that you’ve been paying your rent on time, and if applicable, that you’ve been paying (or receiving) child support or alimony as required. In some cases, you may need to submit statements for any installment debt or outstanding credit card debt.
You’ll also need provide a copy of your tax return, as well as sign a IRS Form 4506-T, so the lender can get a copy of the tax filings you sent to the IRS.
While these tasks may sound a bit overwhelming, your mortgage banker can help you pull all this information together well ahead of time to make the pre-approval and home loan application process go as smoothly as possible.
Do you plan to purchase a home within the next two years? It’s not too early to start getting ready now. Contact Torrance Mortgage Lender Shawn Carvin today to discuss how you can start getting ready. Shawn is a licensed California mortgage professional with nearly 30 years experience in the financial services industry, half of that focused on mortgage lending. Shawn works with clients throughout the greater Los Angeles area including Torrance, the Palos Verdes Peninsula, the Beach Cities, other South Bay communities, and beyond.