Can you afford to buy a house? How much space do you require? Will your dream property vanish from the market before you can get it? The home-buying process is fraught with uncertainties and what-ifs.
One significant concern you may have is whether or not you will be approved for a mortgage. When asked which aspects of selecting a lender make them the most nervous, homebuyers named approval as their top concern, according to a recent poll we performed.
What’s the good news? Take the following steps to increase your chances of acquiring a mortgage.
Keep your debt low
Lenders will consider your debt-to-income ratio when you apply for a mortgage (DTI). Divide your total monthly debt by your gross income to calculate your DTI. Rent, current mortgage payments, car payments, school loans, child support, and credit card minimums should all be considered debt.
A typical DTI for a conventional loan is 36 percent or less. Depending on your overall financial status and credit score, you may be able to qualify for a mortgage with a DTI of up to 50%. If you have a low to moderate income, you may be eligible for an FHA loan, which allows borrowers with DTI ratios of up to 43 percent. For first-time homebuyers, this form of mortgage may be a viable alternative.
Make a plan to begin paying down your debt if your DTI is too high. You can also find ways to supplement your income, such as beginning a side business.
Create and keep an excellent credit score
When applying for a home loan, you’ll also want to make sure your credit score is in good shape. Most loan types demand a credit score of at least 620. The higher your credit score, the more your mortgage alternatives. That means different loan terms and possibly lower interest rates. Aim for a score of 740 or better if you want the greatest possible prices.
A credit score of at least 700 is required to qualify for a jumbo loan. You may be able to qualify for some loan types with a lower credit score, such as an FHA loan with a 3.5 percent down payment and a minimum credit score of 580.
To increase your credit score, maintain your credit card credit utilization below 30%. Always make on-time payments and keep a close eye on your credit record to catch any difficulties or mistakes.
Set up funds for a larger down payment
The amount necessary for a down payment is determined by the type of loan. While 20% down was once considered the gold standard, you can now obtain a house loan with as little as 3%.
The more you can write, the better. Cheaper monthly mortgage payments, better interest rates, fewer upfront fees, and lower closing expenses will result from larger down payments. A larger down payment also functions as a greater hedge against real estate value reductions. The more you put down, the less likely it is that a minor market drop will throw you underwater on your mortgage. (This occurs when you owe more on your mortgage than it is worth.)
A large down payment demonstrates to a lender that you know how to save. A large down payment lowers the loan-to-value ratio, increasing your chances of obtaining the desired mortgage. The loan-to-value ratio is computed by dividing the mortgage amount by the home’s purchase price (unless the home appraises for less than you plan to pay, in which case the appraised value is used). Here’s an illustration. Assume you wish to purchase a $100,000 home. You put down $20,000 (20%) and apply for a $80,000 mortgage. The loan-to-value ratio would be 80% ($80,000 mortgage divided by $100,000 = 0.8, or 80%).
Don’t be scared to look outside the box when it comes to finding a down payment. Consider down payment help programs and tapping into retirement money, in addition to gradually saving up. First-time homeowners can use a Traditional IRA to make a down payment of up to $10,000 without incurring an extra early distribution tax.
Make a head start
When it comes to financial planning for a home purchase, the sooner the better. Don’t let your fear of the process prevent you from taking the initial step. The process of becoming a homeowner is a marathon, not a sprint. You will feel less stressed if you divide it into manageable chunks.
Firstly, you should prove your income. It lists deductions with dates and specifics deducted from the earned amount. The ultimate check stub maker. Filling out, downloading, and printing takes less than 2 minutes. There is no need for software; simply generate your stubs online.
The sooner you begin improving your credit score, paying down debt, and saving for a down payment, the easier it will be to achieve your objectives. Prepare your mortgage ready program at least six months before applying for a house loan.
A step-by-step strategy will improve your chances
Obtaining mortgage approval is a critical step in the process of purchasing a property. After you’ve dealt with all the what ifs, you can concentrate on the enjoyable aspects of buying a new house, such as choosing paint colors and building a backyard sanctuary.
If you’re ready to make your dream of home ownership a reality, getting your finances in order will improve your chances of getting a home loan.