Buying your first property is certainly one of the most exciting things in life- but a mortgage isn’t.
Getting a mortgage can be stressful, especially when you don’t have the proper guidance and there are an overwhelming amount of options. Doing it for the first time can add to the stress. However, you can always brush up on your knowledge and learn about the best practices when applying for a mortgage. Keep yourself aware of the factors that affect your mortgage eligibility so you can get through the process stress-free and ultimately enjoy the outcome.
Keep reading to find out the important things you need to know!
What do mortgage lenders look for?
Eligibility criteria and loan types may vary; however, there are certain requirements that all mortgage lenders typically look for:
Good credit score
A credit score is a three-digit number that indicates your borrowing potential. A higher credit score typically means you are less likely to be deemed a risky borrower. However, the credit score you require depends on the type of mortgage you want.
A good credit score typically falls somewhere between 670 and 739, and an excellent score is anything above 800. Also, remember that the higher your credit score, the higher your interest rate will be.
Lenders want to be sure that you can repay your loan. For that, you need to provide evidence of your income sources which may include both consistent income and employment. This is typically verified through bank statements and tax returns.
Lenders will consider any assets that you could draw on in case of any financial emergencies. This is because your assets make you seem less risky to the lenders and that you can make your payments in time.
The debt-to-income ratio indicates how much debt you carry compared with your income ratio. So, for example, if your gross monthly income is $5,000 and $1,000 of that is spent on debt repayment (such as minimum credit card payments, student loan payments, auto payments, and even child support), your debt-to-income ratio (DTI) is 20%.
To qualify for a mortgage, your DTI should ideally be less than 40% but no higher than 50%. The higher your debt-to-income ratio, the more difficult it may be for you to meet monthly repayment goals.
Five things you need to know before getting a mortgage
Your credit report
Review your credit reports before you plan to go deep into the mortgage application process. The health of your credit score will play a significant role in getting you a good loan deal for a home or even getting approved. You are eligible to receive a free copy of your credit report once every 12 months under Federal Law if you ask for it.
Be sure to check your credit report for any errors and work on improving it. Incorrect information can hurt your credit score. Always remember this isn’t just about approval or disapproval for a loan, but lenders use your credit history to determine whether you should be charged higher interest or not.
Dreams come free, but reality doesn’t. We all dream of huge, gorgeous houses with a swimming pool in the backyard and a manicured lawn in the front to host parties; however, they may not come easy in your budget. Before you set your sights on your dream home, make sure you can afford it.
Lenders look at how much your mortgage payments are relative to your income, ensuring your ability to repay. The best way to determine affordability is to see that your monthly mortgage payment shouldn’t be more than around 28% of your gross (pre-tax) monthly income. Your monthly loan payment is just one piece of the puzzle; there’s also interest, insurance fees, property taxes, commissions, and down payments.
Make sure you properly go through all the numbers to decide what you can easily afford.
There are several mortgage choices available to fit all lifestyles and financial situations. Although a 30-year mortgage is the most common, you might get a loan for as short as ten years. You will have to evaluate your options to decide which type of mortgage loan suits your needs.
There are many different mortgage alternatives available, and they can differ depending on the loan’s size, the period, the type of interest rate, and whether they’re a part of a particular program. It is vital to understand the hazards associated with each kind before choosing.
Negotiate and shop around
While it’s time to secure a loan, don’t let your excitement cause you to close the contract too soon. The entire process of choosing the right mortgage option and the best lender requires research and a lot of patience.
Any amount that you agree on will have an impact on your overall financial state. You’ll need to decide how you want to obtain your loan—for example, through a broker or a bank—and to shop around for the best interest rate and lowest fee options. Always seek advice from several sources to obtain the greatest mortgage offer possible.
Consider getting pre-approved
Buying a home can be stressful, especially with many other protocols. One way to put some pressure off is by getting pre-approved for a mortgage. Getting pre approved means a lender will look at whether you meet all the prerequisites-income, assets, credit score, etc. This will also give you an edge over other applicants since the home sellers know there’s a strong chance of you securing financing.
Getting preapproved doesn’t mean the lender will guarantee the amount you will be approved for, but you’ll get a ballpark idea of how much you can qualify for when shopping for a new home.
Securing a mortgage is one of the primary steps in the home buying process. Make sure you evaluate all your options, research, and take the due time before making a decision.
After all, nobody wants to spend 30 years indebted to a bad loan.