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5 steps before you apply for a mortgage

By Michele Lerner
Mortgage Credit Problems Columnist


Whether you have perfect credit or need a mortgage for bad credit borrowers, the first step toward buying a home should start with your finances -- not finding the home you want to buy. If you are already a homeowner and are considering refinancing, you should still take these steps to get ready to apply for a new loan.

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Surprisingly, a lot of consumers don't know whether they have good credit or bad credit. Some will be pleased that they have a higher credit score than they thought, while others will need to make some improvements with their finances or will need to work with bad credit mortgage lenders in order to qualify for a mortgage.

Here are five steps to take before you get home loan financing, especially if you know or suspect you have bad credit.

  1. Request your free credit report. Every consumer is entitled to one free credit report per year from AnnualCreditReport.com. Go over your report to look for errors and pay careful attention to the section with negative information to see if there are steps you can take to improve your credit and avoid needing a bad credit home mortgage.
  2. Go over your finances. Before applying for a poor credit mortgage, make sure you can afford a mortgage at all. If you have had credit problems in the past but have resolved them and are just waiting for your credit score to improve, you might want to wait to apply for a loan until you can qualify for lower mortgage rates. Develop a budget including all housing costs such as principal and interest, taxes, insurance, homeowners fees and maintenance so that you will be comfortable with your payments.
  3. Gather your bank statements. You will need to have complete documentation of your income and assets to apply for a loan anyway, and going over these papers yourself will give you a clear picture of the available cash for a down payment and closing costs.
  4. Reduce your debt. One of the fastest ways to improve bad credit is to pay off credit card debt. If you have the cash, pay off some debt before applying for a loan.
  5. Take steps to improve your credit. Pay your bills on time and correct any errors to boost your credit score before applying for a mortgage.

Once you have a clear idea of your own budget and finances, enter your information in an online form to see if you qualify with different lenders. It may take a little time, but with discipline you can fix your finances and qualify for a new home loan or refinance your current loan.

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