8 Important Strategies to pave the way to a Successful Home Mortgage Application
Buying your first home is an exciting adventure filled with myriad tasks that require organization, focus, patience and a great sense of humor. Unless you have succeeded in saving lots of cash, you will be joining the millions of Americans who apply for a home mortgage. Here are 8 important steps to take prior to applying for a home mortgage. Doing these tasks before you go online to shop for your new home will help to make your home mortgage process as successful as possible.
- Budget. As we have discussed many times on this blog, budgeting is the key to financial sanity. Before you step into a home mortgage, conduct a critical analysis of your financial situation—how much income do you have? How much money is going out? What assets do you have and who do you owe? Include credit cards, personal loans, your college loans and any other debt that you are carrying. Be sure to include in your budget all the expenses that you do not have as a renter, such as maintenance and property taxes. Don’t forget that your budget must still include saving for emergencies, retirement, and those future dreams such as education and travel. A general rule is that your monthly mortgage payment should not exceed 30% of your total gross monthly income. You don’t want to join the ranks of the “house poor.” Now that you know all the facts, can you afford a mortgage?
- Check Your Credit Report. Pull your credit reports and carefully examine them for any errors. If you find some, contact the respective creditors right away and clean up all false information.
- Pre-Approval. Contact a mortgage broker and apply for pre-approval before you begin working with a real estate agent or go house hunting on your own. Provide the mortgage broker with all of your income, expenses and asset information. The lender will take this data, along with your credit history and determine the maximum amount of home mortgage for which you are qualified. Failing to do this ahead of time could disadvantage you when you are ready to make an offer. The time it takes to get your financing in order could mean that someone else comes along and takes your dream home. The process is free and you are not bound to the loan.
- Reduce Your Current Debt. If you are holding significant credit card and other debt, embark upon a serious campaign to eliminate it. If you find that you are struggling to deal with multiple debt accounts and high interest rates, apply for a personal loan to consolidate your debt. With one payment and better rates, you can move out of your debt situation much more quickly, improve your credit rating and be prepared to successfully apply for a home mortgage.
- Assess Your Debt-to-Income Ratio. Mortgage lenders want to know that you have the financial capacity to make the monthly payments. If you are already maxed out, using most of your income to pay debt, lenders will see you as a credit risk. You could find yourself facing rejection or be limited to the worse deals. Bring the debt down or look for opportunities to increase your income through side gigs, ask for a raise, change your job, or open a micro enterprise.
- Improve your Credit Utilization Standing. Lenders also look at your credit utilization, i.e. how much of your approved credit you are using. For instance, if you are qualified to charge up to $10,000 on your credit card, and you have charged $5,000, then your credit utilization is 50 percent. Work on bringing your credit utilization down to 20 percent or less. It will improve your chances of being approved for a home mortgage and also qualify you for the best interest rates.
- Clean up any Delinquent Accounts. If any of your loans are delinquent, it will be a huge red flag for home mortgage lenders. They want to know that you are a reliable borrower and delinquent accounts will tell them that you are not. Your home mortgage application will be denied. Better to first bring all accounts to good standing.
- Shop Around and Utilize the Services of a Qualified Mortgage Broker. All home mortgages are not created equal. Like any product, a home mortgage can be cheaper or more expensive depending upon the lender and mortgage type. For instance, there are fixed-rate home mortgages and adjustable rate mortgages (ARMs). There are fees charged by the lender to check your credit, appraise the home, and prepare all the sales documents. These fees are not standard across all lenders. Use online resources to check mortgage rates. You might find lenders who are offering special deals during certain periods. Take advantage of everything you can to make your home mortgage as affordable as possible.