Credit score and obtaining a mortgage

Making your homeownership dreams a reality

You've been looking for the perfect home for months. Finally, you see it, and you want to move in right away. But how do you make homeownership a reality? That's where a mortgage comes in.

Most people wouldn't be able to afford a home without a mortgage. To get a mortgage, you'll have to get approved by a lender first. Lenders want to know about your job, bills and credit history to make sure you can make your monthly payments.

Let's take a closer look at the mortgage process and learn more about how  you might be able to get pre-qualified to buy your dream home.

Start the mortgage process

The mortgage process often starts before you even submit an application to your lender. Here's how it generally works. You would:

1. Check your credit score so you know where you stand.
2. Review your credit report for errors and work with the reporting agency to make any necessary corrections.
3. Get a pre-qualification letter from a lender.
4. Go house shopping and make an offer.
5. Shop for the best mortgage rate.
6. Apply for a mortgage.
7. Sign your mortgage paperwork and finalize the sale.

The timeline for finding a house can vary from person to person. However, once you submit a mortgage application, it may take a couple of weeks to a couple of months before you're approved.

Learn what a lender reviews

Lenders need to fully understand your financial situation before making a lending decision. They will specifically look at your:

• Credit report and score: Your account balances, how much credit you have available and how long you've had credit.
• Income: Your current salary and income from other sources.
• Debt: Outstanding loans, like student loans or auto loans.
• Assets: Your bank accounts, investments and retirement savings.
• Down payment: The money you'll pay up front towards the cost of your new home.

Credit is at the top of the list because it plays a big role in mortgage approval. You should review and request a copy of your credit report soon as you start thinking about buying a house, even if you're not sure when you want to buy.

Get pre-approved or pre-qualified

Always check your credit first.  If your credit isn't in tip-top shape, consider making some changes to help build your credit before you start the mortgage process. Once your credit has improved, you'll want to get a pre-qualification or pre-approval letter from a lender that spells out how much they're willing to loan you. It's often up to the lender to decide which type of letter they give you.

The pre-qualification or pre-approval letters are very similar, but there are some key differences.

Pre-qualification

• What is it?
  A basic review of your finances.
• What is it based on?
  Info you report about your debt, income, assets and credit.
• Is a hard credit check (hard inquiry) required?
  Sometimes.

Pre-approval

• What is it?
  An in-depth review of your finances.
• What is it based on?
  Proof of your financial stability (pay stubs, account statements and list of expenses).
• Is a hard credit check (hard inquiry) required?
  Usually.

Pre-qualification or pre-approval letters from a lender don't guarantee you will get approved for a mortgage. These letters help you understand what you can afford, and a seller typically likes to see one before accepting an offer.

Shop for a mortgage

Once you've made an offer on a house and the seller accepts, make sure to shop around for the best possible mortgage terms. Reach out to lenders and ask for loan estimates. The loan estimate includes information on the:

• Borrowing amount.
• Estimated interest rate and whether it's fixed or variable.
• Mortgage points (a type of fee paid at closing that lowers your interest rate).
• Closing costs and other fees.
• Total monthly mortgage payment.
• Loan pre-payment penalties or any other specific terms attached to your loan.

Keep in mind that shopping for mortgage rates within a short period can help protect your credit health. As long as you stick to that timeframe, the credit bureaus will typically count all the credit checks related to the mortgage as one credit check. That way you won't be penalized for multiple hard checks.

Key takeaways

• Check your credit and request a copy of your credit report early in the mortgage process so that you know where you stand. Make sure to fix any issues you find.
• Lenders generally want to know about your credit, income, other debts and how much you have available for a down payment before approving you for a mortgage.
• Pre-approval and pre-qualification letters are a great way to understand how much you can afford. They also help a seller know you're serious.
• It's important to talk with different lenders to get the best possible interest rate with the lowest fees. Your mortgage rate will impact how much you pay over the life of the loan.