Are you ready to purchase your first home? While reality shows lead you to believe that you find a realtor, browse properties, put in an offer, and close the deal, it’s a bit more involved. For starters, homebuyers need to secure financing through a mortgage lender. As lending someone hundreds of thousands of dollars is a considerable risk, home loan providers have a strict set of eligibility requirements applicants must meet. Ultimately, if you’re going to qualify for a mortgage, you need to prepare.
What Can You Afford?
All too often, homeowners purchase a house they can’t afford to maintain. Consequently, the property ends up in foreclosure, and their credit is ruined. Avoiding this outcome boils down to knowing what you can afford. As a homeowner, you’ll not only be responsible for the monthly mortgage payments, but the insurance, property taxes, utilities, and upkeep, along with your regular monthly expenses.
Most lenders review your debt to income ratio to determine what you can afford. While mortgagers vary, most lenders prefer borrowers to spend no more than 30% of their annual income on their mortgage payments and associated expenses.
What’s Your Credit Rating?
Lenders review your credit history to get a clear picture of how you manage your finances. Ultimately, an applicant with a 650 or higher credit score, a history of timely payments, low debt to income ratio, and accounts in good standing will have an easier time getting approved for a loan. They will also qualify for more programs and receive offers for better interest rates and loan terms. If you have a low credit score or a poor financial record, you’re better off trying to improve these things before applying for a mortgage.
Clean Up Your Credit
Most mortgage applications get rejected because the borrower has too much debt, limited income, or a low credit score. You can avoid rejection by cleaning up your credit before applying for a mortgage. Reducing your debt is the most practical way to boost your debt to income ratio and improve your credit history. Take the next 3-6 months to get your finances in order by paying your bills on time and getting rid of accounts with high balances and a negative standing. You can negotiate repayment plans or settlements with creditors or look into financial resources like credit card payment solutions and debt consolidation loans.
Review Mortgage Options
There are a lot of opportunities for borrowers to get good deals on mortgages. If you’re going to take advantage, you need to educate yourself on the various types of mortgages and programs available. Learn about the different types of loans, the difference between a fixed rate and adjustable rate loan, first-time homebuyer programs, down payment assistance, and other perks you may qualify for. Then, compare a few lenders to determine which is the better option. The idea is to find a mortgage that’s affordable and convenient as you’ll be required to repay it over the next few years.
Gather Your Paperwork
Once you’ve reviewed the mortgage options and identified the best lender, you’ll need to gather financial information to apply. While it varies by lender, in most instances, you’ll need bank statements, pay stubs, and tax returns spanning back several years for the lender to review. You may need to show proof of assets, including retirement funds, stock market portfolios, and deeds. Having this information in advance ensures that the application process goes smoothly.
Unless you plan on purchasing a house free and clear, you’ll need the financial support of a mortgage lender to secure a property. Before you get your heart set on a residential property, take the time to ensure you’re prepared financially. Lenders are looking for applicants with a decent credit score and a record of financial responsibility. You can increase your chances of getting the loan you need by following the recommendations above. Then, you can move on to shopping for the house of your dreams.