Your home is one of the biggest financial investments you’ll ever make in your lifetime. If you’re like most people, you’ll need the help of a mortgage to make it happen. Mortgages are viewed as the default way to finance a house, but that doesn’t guarantee that you’ll qualify for the one you want, especially if you’re a first-time homebuyer. The entire process can be daunting and overwhelming as there are tons of steps involved, and anyone new in the real estate market may not know all the best practices. So, how do you make yourself more attractive in the eyes of your lender? Read more to learn six expert tips to boost your chances.
Understand What the Lending Landscape Looks Like
Before starting your mortgage application process, it’s essential to speak to a mortgage advisor to learn how the industry works and start planning in advance. Real estate is one of the most complicated industries, and knowing the major players will help you navigate through the crowded lending field. Conduct thorough research on various mortgage lenders to understand favorable interest rates and terms of payment. Check whether the lender you’re considering is registered in the state you’re shopping for your home. The Nationwide Multistate Licensing System Registry can help you do that smoothly, but don’t forget to search for unbiased reviews and information.
Know Your Loan Options and Start Planning
Finding the right mortgage to finance your dream home goes beyond choosing a 15 or 30-year term. There are critical considerations to make, such as the amount of money you want to borrow, which is substantially affected by the down payment you make and your credit score. You also need to assess your finances and determine whether to go for a fixed interest rate or adjustable interest rate. You need to know the available mortgage options for you and choose what fits your needs. When finding a loan option, focus on the size, location, and price of the house you want to buy, your income, interest rates, and the flexibility of repayment. You can use a mortgage calculator to check monthly loan payments based on the price of your property.
Make Sure Your Credit Score is in Good Shape
Check your credit report before your potential lender does. As a first-time homebuyer, the best way to increase your odds of getting a mortgage approved is to check your credit score and repair any damages. A good repayment history means you’re financially disciplined and can be trusted to repay your mortgage on time. Lenders have specific criteria to check whether your credit score is good enough for a mortgage or not. A low credit score typically means lending to you is risky, increasing your interest rates. On the other hand, a higher credit score provides you with the power to negotiate for better rates with potential lenders. A good rule of thumb is to maintain a credit score higher than 580 to be considered a potential mortgage candidate.
Detach From Ex-partners Especially Those with a Bad Credit History
If you’re financially linked to other people, ( a common occurrence when applying for a joint account or loan) but currently separated, you can detach yourself before applying for your mortgage. This is a vital step as their credit score can negatively impact your chances of getting a mortgage. Any late repayments or misdemeanors will reflect negatively on you. To do this, you can write a letter to the credit agencies to ask for a notice of dissociation. Check if you’re still linked to other people through bank accounts to ensure their credit score doesn’t affect yours. Even if the person has a good credit history, it is still important to detach yourself because you still risk problems in the future if they begin missing payments.
Lower Your Debt-to-Income Ratio
A debt-to-income ratio is a percentage of your gross monthly income that goes to paying your monthly debts. It is issued by lenders to determine your borrowing risk and measure your ability to manage the payments. The lower the debt-to-income ratio, the higher your chances of getting approved for a mortgage.
Generally, your debt-to-income ratio should not go above 43 percent if you are applying for a mortgage. Above that, lenders are likely to decline as your monthly expenses can go beyond your income. While it’s easier said than done, you only have two options to reduce your debt-to-income ratio; increase your gross monthly income or reduce your monthly recurring debt. However, the most reliable way to increase your revenue is to try and reduce your expenses and find a second job or work a few extra hours in your primary job.
Go Large on Your Down Payment
The best way to showcase your financial discipline to your lender is by applying for a mortgage with a big down payment. Lenders are more inclined to trust that you will pay a large amount of money when you show that you can also save a large amount of money. A big down payment reduces your loan to value ratio and increases your chances of getting the mortgage you want.