If you’re thinking about buying a home and you’re like most people, you don’t have enough cash saved up to purchase one without getting a mortgage. Here are five tips to help you get your credit and finances in order before you apply.
- Credit score. Your credit score helps lenders determine your risk. It’s one of the factors they use to decide whether to approve your loan application and what interest rate to charge. In general, people with higher credit scores are more likely to be approved and qualify for lower rates. If your credit score needs some work, you may want to take steps to improve it before applying for a mortgage to ensure you get the best possible terms.
- Debt-to-income ratio. Also known as DTI, this ratio is an expression of your monthly debt payments compared to your monthly income. Typically, lenders want this ratio to be 41% or less to qualify for a mortgage. If you’re carrying a lot of debt, consider paying it down before applying for a mortgage to help improve your chances of qualifying.
- Income. A lender won’t approve you for a mortgage if you can’t afford to repay it. Before you start house hunting, review your current income and expenses, set a realistic housing budget and make sure you’ll be able to comfortably afford your monthly mortgage payments.
- Assets. Lenders will also review your assets, including savings, checking and money market accounts, retirement savings, CDs, stocks, bonds, etc. Having a cash cushion makes you less of a risk to the lender because it shows you can weather a potential financial setback such as a job loss or unexpected medical emergency.
- Down payment. You may have heard you need to have a down payment of at least 20% of your home’s purchase price. The reality is there are many loan products available that require a much lower down payment. But the larger your down payment, the less risk you pose to the lender. If you can’t save 20% for a down payment — and many people can’t — you may still be able to qualify for a mortgage. But you’ll probably have to pay for private mortgage insurance (PMI) until you have 20% equity in your home, and that will increase your monthly mortgage payment.
If you want to learn more or find out whether you qualify for a mortgage, give us a call today.