Searching for your new home is an exciting process, and finding the one you want can be thrilling, but if you are like the majority of people, you are going to have to get a loan to actually buy it. Obtaining a home loan is a huge undertaking, and many people enter the process completely unprepared. What do you need to know before you go to a mortgage lender and ask for the funds to take possession of your dream?
First of all, know your credit score. In today’s digital era, it takes literally a few minutes to find out your score online. A low credit score or any kind of fraudulent activity that may have happened to you unawares can stop the mortgage process in its tracks. A large percentage of lenders require a minimum credit score of 680 and if your score falls below this, many lenders may deny your request for a conventional loan.
In addition to credit score requirements, factors such as multiple missed payments, frequent lateness, and other derogatory credit information can hamper mortgage approvals. Pay your bills on time, lower your debts, and stay on top of your credit report. Cleaning up your credit history beforehand and fixing errors on your credit report will help you in the approval process.
Another tip for securing a mortgage loan is to have cash in hand for the down payment. Walking into a lender’s office with no cash can be a risky proposition. Each lender establishes its own criteria for down payments, but on average, you’ll need at least a 3.5% down payment. Aim for a higher down payment if you have the means. A 20% down payment not only knocks down your mortgage balance, it also eliminates the need for private mortgage insurance (PMI) which lenders attach to properties without 20% equity. Paying PMI increases the monthly mortgage payment. If your down payment is high enough not to require it, you can enjoy lower, more affordable mortgage payments.
Something many people may not consider when applying for a mortgage is that lenders don’t only look at your credit history and bank accounts, they look at your future earning potential as well. They want to see that you have steady employment so they can feel confident in your ability to make your payments. Borrowers have found themselves unable to finalize their home loan because the primary breadwinner quit their job just days before the closing. Remember, the lender is betting on you. You want to show that you are a safe investment.
In the same vein, the lower your debt to income ratio is, the better you look to a lender. If your ratio is high because you’re carrying a lot of credit card debt, the lender can turn down your request or offer a lower mortgage. Your entire monthly debt payments, including your desired mortgage, shouldn’t exceed 36% of your gross monthly income. Paying down your consumer debt before completing your loan application lowers your debt-to-income ratio and can help you acquire a better rate.
Even if your debt load does not prevent you from being approved for a mortgage, it’s important to avoid acquiring new debt while going through the process. Lenders will re-check your credit before closing, and if your credit report reveals considerable new debts, this may delay or prevent the closing. As a general rule, it is best to avoid any major purchases until after you’ve closed on the loan. This includes financing a new vehicle, purchasing home appliances on your credit card, or co-signing someone else’s loan.
Ultimately, if you don’t meet the qualifications for a mortgage loan on your first try, don’t get discouraged. Let it motivate you to improve your financial profile and credit. Many people have risen above credit problems, even extreme ones like bankruptcy or foreclosure, in order to purchase their first home. You can too!
At Setco, we help you navigate the path to home ownership with our professional title services. We make the journey to the closing table as easy as possible with our custom tailored plans, designed to help our clients get through the paperwork and into their new homes with minimal stress.
Please click below to find out what we can do to serve you at one of our conveniently located local offices throughout the Florida Panhandle.