Buying a home is probably the most expensive and greatest investment you can make in your life. Very few people can afford to buy property using cash from their savings account. However, with a mortgage, you can realize your goal and buy your dream home. Getting a mortgage is not always easy, especially if you are a first-time homebuyer. There are certain steps that you can take to improve 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 score before they approve your mortgage loan, and they will evaluate 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 should not 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
As a rule of thumb, you should aim to maintain a high credit score to improve your chances of getting your loan approved. You must try to keep your credit balances low and beware of using 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 significantly vary. Another thing that you should be wary of before you apply for mortgage concerns the interest rate for the loan. It is important to utilize tools offered by different lenders to calculate mortgages so that you can make an informed decision. With the right tool to calculate your mortgage interest, you can get a clear view of how changing the interest rate might affect your monthly payment. The tool also allows you to compare fixed and interest-only payments that you will make every month.
3. Check Your Credit Report
You must get a detailed report of your credit history to help you determine if you qualify for the loan that you want. You are entitled to get a free credit report at least once every year. You should never assume that everything is fine with your credit report since you may realize at the last minute that it contains some mistakes. Take a close look at your report and fix any mistakes since these may jeopardize your mortgage application. Some of the things that you should check on your credit report include the following:
- Wrong information
- Discharged debts but still appearing on your report
- Information on your former spouse that should not be there
- Details of closed accounts
- Outdated information
You should make sure that you rectify all the errors on your credit report before applying for a mortgage. Contact the credit agency immediately if you observe some anomalies 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. On top of that, the financial institutions also consider the borrower’s debt load before they approve their mortgage application. Therefore, it is vital to monitor your debt-to-income ratio to increase the chances of your loan approval. In other words, you should lower your debt-to-income 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-to-income ratio, it means that you have a fine balance between the money you earn and what you owe to different creditors. As such, if your debt-to-income 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 that you want. To lower your debt-to-income ratio, you must try to reduce your recurring debt. Alternatively, seek other means to increase your monthly income. To achieve this, you must reduce your expenses and carefully check where your money is going. It might not be easy to find a second job, but you may consider side hustles to earn extra income.
5. Offer a High Down Payment
A large down payment can go a long way in convincing the lender that you are committed to getting the mortgage that you want. Additionally, a big down payment is also advantageous in that it significantly reduces your loan-to-value ratio. The loan-to-value ratio is usually calculated by dividing the loan amount by the purchase price of the home. For instance, if you plan to buy a house for $100,000, and you offer a down payment of $30,000, it means you are seeking a mortgage of $70,000. What this means is that your loan-to-value ratio would be $70,000 or 70% of the total value of the home.
Also, a larger down payment means that you can qualify for a lower interest rate. You will also pay smaller monthly payments for the loan if your down payment is high. Another critical thing is that you would not be subject to getting mortgage insurance after paying down a large sum of money. This will help you save money that you can use for other pertinent things.
6. Talk to a Mortgage Broker
You must sit down with a financial advisor before you apply for a mortgage. Lenders are in business, and they may offer terms that are too good to believe. However, the bad thing is that you may end up buying a home that you cannot afford. Unfortunately, you may not be able to reverse the agreement once you sign it. Therefore, talk to a mortgage broker to help you pick something that you can manage in the long term. Experienced brokers can help you with your finances, and they also understand all the commitments that come with mortgages.
7. Avoid Getting New Debt
Mortgages come with a lot of financial commitments for both the borrower and the lender. The lender is primarily concerned about your ability to repay your loan. Therefore, you should avoid getting any new debt before applying for a mortgage. A lot of unserviced debts can compromise your application. Lenders are skeptical about borrowers who are obligated to make monthly payments for a variety of credit. If you have other credit accounts, make sure they are up-to-date and avoid using your credit card or anything that can increase your total debt.
8. You Must Have Stable Employment
Stable employment can significantly increase your chances of your mortgage application being approved. No matter what kind 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. This will help the lender to evaluate your capability 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 steady income. Sorting your finances first will help you to apply for a loan that is likely to be approved. As a general rule, the lender will not offer a loan that is more than 4.5 times the salary or income you get per month. Therefore, you must put all your documents in order and avoid falsifying any information. You should ensure that you provide verifiable details about your source of income, or else you may not qualify to get the mortgage you need for your home.
9. Ask the Lender about Their Requirements
As you are now aware, buying a home is not an overnight event, but a long process that involves many things. Therefore, you must reach out to your lender and get a checklist of the things they will be looking for before they approve any mortgage. The lenders are in business, and they are always looking for potential buyers who can afford to repay their loan. You need to take some time to determine the amount of money that you can borrow before you approach the lender.
It is essential to ask the loan broker to provide all details that you must provide before you apply for a loan. Additionally, you should understand all the terms and conditions offered by the lender before they approve your mortgage application.
If you are thinking of buying a home through a mortgage loan, there are different things that you should consider. It is difficult to get a mortgage due to tighter lending conditions prevailing in different places. However, the good news is that there are several steps that you can take to increase your chances of getting the loan that you want. It is crucial to check your credit report and take the necessary steps to improve your score. You also need to lower your debt-to-income ratio while at the same time-saving money for a down payment. More importantly, you must consult a loan officer and get all the questions answered before you apply for a housing loan.