NEW YORK (MainStreet) — The biggest piece of debt you're ever going to take on in your life will be a mortgage. All told, Americans have over $8 trillion in mortgage debt. So whether you're buying your first house or your fifth, you should give some serious thought to how, where and even when to get your mortgage.
But with mortgage rates inching up to to 4.18% nationwide and the Federal Reserve expected to raise interest rates later this year, consumers are looking to lock in low mortgage rates while they still can. Of course, when it comes to borrowing money to buy a house, it might make more sense to wait a little bit than to buy right away.
Fix Problems With Your Credit First
"People tell me that they're looking to buy a house, but they just found a problem with their credit," says Gerri Detweiler, director of consumer education with Credit.com. This mistake might not make a big difference when it comes to your credit score. However, Detweiler says that just 30 points might make the difference between one loan product and another. Patience, in this instance, may be more than a virtue; it can be a cash-saver. "If you rush in, you might get a loan that's more expensive and it can be expensive to refinance out of that loan in a year or two," she said. Waiting a bit can give you time to give your credit report some TLC, remove mistakes or old bad debts and get yourself in a better position to borrow on more favorable terms.
There are other problems you can have with your credit than just mistakes. "A federal tax lien is something that you can fix," says Detweiler. "Or your balances might be closer to your limits than what is ideal." She also advises caution when disputing mistakes. "You have to be careful, because an open dispute on your credit report might slow down your mortgage process," Detweiler says. "You have to dispute it, but make sure that the dispute is finalized before you apply for a mortgage." That usually takes a couple of months to accomplish.
Stick With Your Job for a While
"The time on your job can make a big difference," says Detweiler. Banks don't just want you to be making a certain level of income. They also want you making it for a certain period of time and at the same job -- usually at least two years. As anxious as you may be to nab a mortgage, Detweiler says that if you've only been at your job for six months or a year, you'll want to stick around a little bit longer to increase your chances of getting a mortgage and ensuring you snag the right kind of mortgage.
Get Your Paperwork Together
Increasing numbers of Americans are self-employed or contractors. What this means is that they don't have a job, per se. What they have is effectively a very small, one-employee business. That might make your day-to-day life easier, but it's going to make obtaining a mortgage product a bit harder. "You want to make sure that you have all the documentation you need," Detweiler says. That means getting your taxes done over a couple of years to have some way of showing banks what you earn. You might like your accountant helping you to get your reportable earnings down come tax time, but a bank isn't going to want to see that you're not making any money.
An Alternative Perspective on Waiting
Kevin Levent, president of Better Homes and Gardens Real Estate Metro Brokers, says that when it comes to getting a loan these days, you're either getting approved or you're not. "The only time you should wait is if you don't think that you can qualify, because your credit score won't allow it, or you don't have viable, steady employment," he says. He adds that predatory lending laws in the wake of the 2008 financial crisis have changed the way that lending is done.
Put simply, it's just too risky for a lot of lenders to offer the wide swath of lending services that they once offered. "I'm approving down to 620, and FHA loans are down to 600, but I'm not jacking anybody's rate because of credit," he says.
In other words, he says, it's worth trying to get a loan and seeing if you get approval. Waiting to give your your personal credit profile a spit-shine may not be as lucrative as it once was.
"There's no risk-based lending anymore," he said. "People either qualify or they don't." In the event that they don't qualify, there might be a private placement loan in the 6-6.5% rate. "That's very rare, though," he says.
Either way, Detweiler points out another reason why it might make sense to wait to get a mortgage. "You can have more time to make a better decision," she says. "Once you get into the process, it can get intense very quickly." Waiting to get a mortgage can give you more time to look at rush hour commutes, research schools and get a better feel for neighborhoods. "If nothing else, it can give you more time to make a more rational decision in what's generally a pretty emotional process," she says.