Buying a home is probably the most expensive and most important investment you can make in your life. Very few people can afford to buy property using money in their savings account. However, with a mortgage, you can achieve your goal of buying the home of your dreams. Getting a mortgage isn’t always easy, especially if you’re a first-time buyer. There are steps you can take to increase your chances of getting a loan. Here are nine things you can do to increase your chances of getting approved for a mortgage.
1. Build a good credit score
Your credit score reflects your overall credit health. Most lenders consider your credit rating before approving your mortgage, and they’ll assess your credit risk based on your score. A credit score is calculated from different sources of credit data on your credit report. Therefore, if you have bad credit, try to find ways to improve your rating. Improving your credit score shouldn’t be a very difficult task. You can try some of the following steps:
- Pay your bills on time
- Reduce your debt
- Avoid new credit
- Dispute incorrect information that may appear on your credit report
Generally, you should aim to maintain a high credit rating to improve your chances of getting your loan approved. You should try to keep your credit balances low and beware of credit cards.
2. Compare mortgage lenders
It is imperative to shop around and compare mortgage lenders to get the best deal. Lenders are different and their terms and conditions vary widely. Another thing you should be wary of before applying for a mortgage is the interest rate on the loan. It is important to use the tools offered by different lenders to calculate mortgages so you can make an informed decision. With the right tool to calculate your mortgage interest, you can get a clear idea of how changing the interest rate may affect your monthly payment. The tool also allows you to compare the fixed payments and the interest-only payments that you will make each month.
3. Check your credit report
You should get a detailed report of your credit history to help you determine if you qualify for the loan you want. You are entitled to a free credit report at least once a year. You should never assume that all is well with your credit report, because you might find it flawed at the last minute. Carefully review your report and correct any errors, as they could jeopardize your mortgage application. Some of the things you should check on your credit report are as follows:
- Wrong information
- Debts paid but still appearing on your report
- Information about your ex-spouse that shouldn’t be there
- Details of closed accounts
- Obsolete information
You should make sure you rectify any mistakes on your credit report before you apply for a mortgage. Contact the credit bureau immediately if you find any discrepancies in your report.
4. Have a favorable debt-to-income ratio
Lenders rarely offer loans that exceed more than five times the income earned by the borrower per year. In addition, financial institutions also take into account the borrower’s debt level before approving their mortgage application. Therefore, it is essential to monitor your debt ratio to increase the chances of your loan being approved. In other words, you should reduce your debt ratio to increase your chances of getting a mortgage. A debt-to-income ratio compares the total amount of debt to your overall income.
If you have a low debt ratio, it means that you have a fair balance between the money you earn and what you owe to various creditors. So if your debt ratio is low, the chances of getting a mortgage would be very high. If your monthly expenses are very high compared to your income, you might not get the loan you want. To reduce your debt ratio, you must try to reduce your recurring debt. You can also look for other ways to increase your monthly income. To do this, you need to reduce your spending and check where your money is going. It might not be easy to find a second job, but you may want to consider side activities to earn extra income.
5. Offer a high deposit
A large down payment can go a long way in convincing a lender that you are committed to getting the mortgage you want. Moreover, a big down payment is also beneficial because it drastically lowers your loan to value ratio. The loan-to-value ratio is usually calculated by dividing the loan amount by the purchase price of the house. For example, if you are planning to buy a house for $ 100,000 and offer a down payment of $ 30,000, that means you are looking for a mortgage loan of $ 70,000. This means that your loan to value ratio would be $ 70,000 or 70% of the total value of the house.
Plus, a larger down payment means you can qualify for a lower interest rate. You will also pay lower monthly loan payments if your down payment is large. Another essential thing is that you would not be subject to mortgage insurance after paying a large amount of money. This will help you save money which you can use for other relevant things.
6. Talk to a mortgage broker
You should sit down with a financial advisor before applying for a mortgage. Lenders are in business and may come up with terms that are too good to be credible. However, the bad thing is that you might end up buying a house that you can’t afford. Unfortunately, you may not be able to cancel the agreement once you have signed it. Therefore, talk to a mortgage broker to help you choose something that you can manage for the long term. Experienced brokers can help you with your finances, and they also understand all of the commitments that come with mortgages.
7. Avoid incurring new debt
Mortgages come with many financial commitments for both the borrower and the lender. The primary concern of the lender is your ability to repay your loan. Therefore, you should avoid incurring new debt before applying for a mortgage. A large number of unpaid debts can jeopardize your application. Lenders are skeptical of borrowers who are forced to make monthly payments for a variety of loans. If you have other credit accounts, make sure they’re up to date and avoid using your credit card or anything that can increase your total debt.
8. You must have a stable job
Stable employment can greatly increase your chances of your mortgage application being approved. No matter what type of work you do, it should give you a steady income. On top of that, you should be able to prove that you have been in your current job for a reasonable period of time. This will help the lender to assess your ability to repay your loan.
Even if you are self-employed, you can still get a loan to buy a home as long as you can prove that you have a stable income. Sorting out your finances first will help you apply for a loan that is likely to be approved. Typically, the lender will not offer a loan greater than 4.5 times the salary or income you receive per month. Therefore, you must put all your documents in order and avoid any falsification of information. You need to make sure you provide verifiable details about your source of income, otherwise you may not be eligible for the mortgage you need on your home.
9. Ask the lender what their requirements are
As you now know, buying a home is not an overnight event, but a long process that involves many things. Therefore, you should contact your lender and get a checklist of what they will look for before approving a mortgage. Lenders are in business and they are always looking for potential buyers who can afford to repay their loan. You should take the time to determine how much money you can borrow before you approach the lender.
It is essential to ask the loan broker to provide all the details you need to provide before applying for a loan. In addition, you must understand all of the terms and conditions offered by the lender before approving your mortgage application.
There are a number of things to consider if you are considering buying a home through a mortgage. It is difficult to get a mortgage due to the more stringent loan terms that prevail in different places. However, the good news is that there are several things you can do to increase your chances of getting the loan you want. It is crucial to check your credit report and take the necessary steps to improve your score. You should also lower your debt ratio while saving money for a down payment. Most importantly, you should consult with a loan officer and get all questions answered before applying for a home loan.