If you want to buy a home, unless you are very wealthy already, you need a mortgage. Applying for a home loan can be a daunting prospect, and it is much easier to get approval if your financial health is in tip-top condition.
To that end, here are some must-follow tips that will put you in a strong position, whether you are a first-time buyer or an existing homeowner looking to expand your property portfolio.
Reduce Existing Debts
When lenders consider mortgage applications, one of the key things they take into account is how much debt a prospective customer is already burdened with.
Being in debt is not a problem in its own right; what really matters is your debt-to-income (DTI) ratio. Expressed as a percentage, this lets lenders calculate how much of your monthly earnings are already committed to paying off credit cards and loans.
A DTI of 36% or less is desirable, so before you even consider applying for a mortgage, reduce your existing debts as much as possible.
Consider Your Credit History
A quick look at the various loan packages over on moneywise.com/mortgages/mortgage-rates will reveal that a whole host of appealing deals with cost-effective rates are available at the moment. However, you will only be eligible for them if your credit history paints a positive picture of your approach to money.
Agencies which provide credit scores to individuals and businesses are always tracking what you do with your cash, so if you miss payments on credit cards and loans, or even if you do not make use of your credit at all, this will count against you.
The answer is to always be timely with your debt repayments, and also to use credit sensibly where possible. Having no credit history is just as much of a barrier to getting a mortgage as having a bad record.
Build up Your Down Payment
The vast majority of mortgage packages are only available to those borrowers who already have a decent chunk of cash to commit in the form of a down payment.
Saving up as much money as possible for the purpose of securing a mortgage on your home is a good idea for a few reasons, chief amongst which is that you will probably unlock access to the most favorable loan packages with the lowest rates of interest.
You could also avoid having to pay private mortgage insurance, which is something that those with down payments of less than 20% of the property’s value may have to commit to in order to be approved by lenders.
Of course you might be hoping to make use of an inheritance or a one-off gift from a family member to help make up your down payment, especially if you are eager to get onto the property ladder as soon as possible.
This is fine in principle, but remember that lenders will want to know the source of your down payment, and if it comes from anything other than your own savings then this could affect the terms of the loan.
Factor in Closing Costs and Other Expenses
Finally, remember that the down payment is just one of the things you will need to save for when getting a mortgage. You will also need to consider the closing costs that will apply in your case, as well as the property taxes and the ongoing expenses of owning a home.
Your financial health is something that you need to tend to over time, just like your physical health. Plan for the long term and home ownership should be within your reach.
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