Don’t Apply For a Mortgage Until You Do THESE

Before buying a house, a potential homeowner is going to need to apply for a mortgage (unless, of course, they are able to pay in cash). And getting a mortgage can be a stressful experience, especially for a potential buyer who does not know what to expect.  

As with most things, preparation is key. So it stands to reason that prepping before talking to a lender can help a buyer feel more confident going into the process.  

With that in mind, here are three main areas for home buyers to focus on.

Increasing Your Credit Score

Having a high credit score is good and almost necessary to get access to the best rates on a mortgage.  The borrower’s credit score is what a lender will look at to determine if offering a loan would be a big risk or not. As you can imagine, lenders want to give mortgages to low-risk borrowers so they like to see higher credit scores.  However, that does not mean that a person with a low credit score cannot get a mortgage.

Most lenders are going to look at the FICO credit score.  To have a perfect score a borrower would need a score of 850.  This is hard to achieve and an excellent credit score of 760 or more is adequate to get a good interest rate from the lender.  A score from 700 to 759 is still considered good and most lenders will provide a loan even in the fair range of 650 to 699.

Be aware that any score that is under 650 is going to make a lender wary.  This score is likely to mean there are a lot of problem areas on the credit history.  While there are some lenders who will work with low credit scores, it is much better if the borrower works to increase their score first.

Getting a Down Payment

Many people think of a down payment and remember hearing it is necessary to have twenty percent down.  This is a large sum of money depending on how expensive the home will be. Having a high down payment is a good thing but it is not always necessary to have twenty percent.  That being said, having twenty percent down helps a buyer avoid paying private mortgage insurance.

There are plenty of lenders that will allow someone to buy a house without twenty percent down.  Some loans like an FHA loan only need three and a half percent down. Certain programs may even bypass the need for the down payment altogether.  This all depends on the buyer’s situation and a variety of factors.

Someone that is looking to have a higher down payment but is unable to save that amount should look at down payment assistance programs.  There are many programs out there that help home buyers prepare to own a home, providing some financial aid for them to start the process.

Debts

Debts play a major role in getting a mortgage.  There is a ratio of debt-to-income (DTI) that comes into play when meeting with a lender.  The buyer’s DTI shows all debt payments combined compared to their total monthly income.

Lenders want to see borrowers with low DTI ratios.  The lower the ratio the less stress the borrower will have financially when adding in a mortgage.  Most lenders have a certain ratio they will allow to approve the mortgage. Usually, this ratio should be no more than thirty-six to forty-three percent with the mortgage included.

Getting a mortgage can be difficult for someone that has not paid attention to their financial stability.  Saving up for a down payment can be a long and tedious process, although there are some programs out there to help.  Paying down debts to keep DTI ratios low is recommended. And of course, a home buyer should work on having as high of a credit score as possible.