Here’s how to prepare when applying for a mortgage

Park State Bank Steven J. Raj 08-20-2013By Steven Raj

Spring weather has arrived in the Northland, and the home-sale market is heating up, too.

As more for sale signs pop up and more buyers look in earnest, it’s a good time to consider financing a new home and the steps you’ll need to take as a buyer to be prepared. I tell clients to consider the financing side of home purchasing before they start looking for that new home. That way, they know exactly what to expect and what they can afford. Here are some of the fundamentals you need to know as you begin the process of applying for and qualifying for a mortgage loan:

  • Gather your documents: Your lender will want to see evidence of your current financial situation as well as your financial history. You’ll need to provide your W-2 statement for the last two years and your paycheck stubs. If you are self-employed, you will need your personal income-tax returns from the last two years and possibly your business tax returns as well. Your lender needs to verify your income as well as your employment status and history. If you have gaps in your work history, be sure you can explain them and show how your situation now provides a steady income stream.
  • Credit is crucial: Lenders will want to review not only your credit score but also your overall credit depth. If you have a great score but not a lot of credit history, you still may not be able to qualify for a loan. Especially for first-time homebuyers, showing a strong history of borrowing and being able to repay those funds is important. Lenders usually like to see at least four lines of credit that have been open, with a solid repayment record, for the past 12 months. But be wary of opening a lot of new credit cards or other credit accounts right before you apply for a loan, as these may bring down your credit score.
  • Non-traditional forms count, too: As you assemble your credit documentation, don’t forget non-traditional forms such as proof that you are current and have made timely payments for rent, utilities and recurring expenses such as home and car insurance. These are not traditional forms of credit, but they count in your favor if they show you as a reliable payer of your bills. Ultimately, that’s what a mortgage lender wants to see.
  • Ask about credit help: If your credit score is not where it needs to be, or if you don’t have sufficient credit depth, ask your lender about credit-building tools that can help. Community banks often have “credit builder” programs that allow you to take out a loan, place the proceeds in savings and pay the lent money back over time. It’s an easy, simple and safe way of building your credit while also building up a savings account to help with your home purchase.
  • Debt-to-income ratio matters: After reviewing your financial situation, your lender will do a calculation to determine your debt-to-income ratio. This is simply a tally of all of your credit payments and other recurring bills, along with your anticipated new house payment, divided by your income. Your debt-to-income ratio should never exceed 45 percent. If it does, you may only qualify for a smaller house payment, may need a larger down payment or will have some work to do to get your finances in better shape.
  • Explain large deposits: If you have recent large deposits in your bank account, your lender will ask you about them. Be prepared to explain them. Your lender needs to be sure that these are not borrowed funds that you will need to repay at some point. Keep a paper trail of any large deposits, such as proceeds from a car sale or funds transferred from other accounts.

Shopping for a house is exciting, whether it’s your first one or simply a new place to call home. You’ll be prepared to make the deal on the new house you want if you know what to expect when it comes to financing that purchase—and especially if you have started early and are pre-qualified to make an offer.

Steven Raj is Vice President of Lending at Park State Bank in Duluth. You can reach him at stevenr@parkstatebank.com or 218-727-8001.

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When you shop for a car, shop for the loan as well

Park State Bank logoBy Dale Lewis

I’m pleased to see how diligent most people are these days about shopping for a car. But I’m equally disappointed to see how many of them fail to apply that same diligence when it comes to shopping for the money to buy a car.

When they’re looking for the right make, model and price of car, they search high and low, at local dealers, sometimes out of the area and certainly online. They’ll make sure they understand the value of the car they want, comparing new-car prices and scrutinizing reseller value books for used cars to make sure they’re not paying a penny more than they should.

But when the negotiating is over and they’re happy with their deal, they’ll stop. The problem is, they’re only about halfway through.

The financing that most buyers need to purchase a car is at least half of the battle. But too many buyers fail to realize the importance of shopping for the best vehicle loan.

It’s not difficult. Most importantly, the shopper’s tool needed to get the best loan deal is the same one that the diligent buyer has already used to find the best car at the best price.

The best advice I can offer is don’t take the first loan offer you get. You wouldn’t do this with your car choice or price. But that’s exactly what many buyers do when they have picked out their vehicle, agreed on price and are ready for the financing.

Start shopping for your auto loan before you shop for your new vehicle. Narrow your search to several respected lenders, offer your credit history and see what they propose.

You can include your car dealer’s lending options in that search. But don’t forget traditional lending resources such as your local community bank, especially if you have a relationship with that bank. An independent lender doesn’t have the need to sell you a vehicle. As a result, they can look at the loan as the separate transaction that it is.

Check rates, loan terms and payment options. If one loan program looks good, ask other lenders if they can beat it.

Also, consider taking dealer incentives such as money off the purchase price instead of a lower loan rate and then trying to match or beat that rate with another lender. Doing this may give you the best of both worlds.

When you offer your credit history to lenders, it will count as an inquiry on your credit history. But if you do your loan shopping in the space of two weeks, it shouldn’t impact your credit score any more than a single inquiry.

As you shop for your loan, or even beforehand, familiarize yourself with your credit history and know your credit score. This will give you a firm grasp on your credit picture and will let you know if what lenders tell you is in line.

Don’t be so eager initially to talk monthly payment with your lender. Yes, this is important in the end. But one way many car buyers end up paying a lot more is by lowering their monthly payments and extending the loan term for a longer period—sometimes much longer. Do at least rough calculations about what you can afford, in terms of a down payment and your monthly payments. Think also about how long you plan to own the car as you’re determining your loan term.

These are just a few tips for those in the market for a new or used car. It’s great to be aggressive when it comes to finding the right vehicle at the right price. But remember that when you’ve struck a deal on a new car or truck, you’re only halfway done.

Dale Lewis is president of Park State Bank in Duluth. You can reach her at president@parkstatebank.com or 218-722-3500.

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