Buying a home is certainly one of the greatest milestones in a person's life and one of the most exciting things you will ever do. It is like getting your own future settled and your children safe. However, buying or constructing your home is also very expensive. Unless you have an extensive amount of money or you are a millionaire, you will need to take out a mortgage to help you finance the purchase of your home. Truth be said, applying for a mortgage can be a long and nerve-wracking process, especially if you do it for the first time. So, we have prepared a short guideline that will help you be successful and get the mortgage.
Good Credit
Mortgage lenders look up a couple of criteria before they decide to give you a mortgage. Typically, eligibility may vary based on the lender and loan type, and there are usually some requirements that mortgage lenders will look for. The first thing on the list is definitely good credit. The credit score often depends on the type of mortgage you are applying for, and you should have at least 620 for a conventional loan. But, on the other hand, you can qualify with some lower credit scores for some different types of mortgages, such as those backed by organizations such as the Federal Housing Administration.
Calculate How Much House You Can Afford in the First Place
Before you even start looking for your dream house, you should make sure that you can afford it. There is a simple 28/36 rule that can help you estimate how much house you can really afford to buy. In addition, there are also interest-only mortgages, which means you will pay just the interest without paying the mortgage back. So, if you have an interest in a new mortgage, these are definitely things to consider. Another important factor to reconsider is the previously mentioned DTI. So, for instance, if your DTI is 50%, this means that 50% of your pre-taxed income is already reserved for debt repayment.
You can also find an online home loan interest calculator so you can get an idea of how much your mortgage will be.
In the ideal case, your “front-end” DTI, which includes solely mortgage-related expenses, should at least be below 28%. On the other hand, your “back-end” ratio, which includes both mortgage and other debt obligations, should not be above 43%, even though 36% is perfect. So, if your DTI is too high, you will need to invest effort in reducing or eliminating debt before you apply for a new home loan. And you must remember, your monthly loan payment is just a small fraction- there are also some things such as interest, property taxes, homeowners' insurance, and potentially homeowners' association fees. You should also beware of how much down payment you can give and if there is a possibility for you to be required to pay for PMI.
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Debt-to-Income Ratio
Your debt-to-income ratio is the amount of money you owe in monthly debt compared to your income. Normally, to be able to qualify for a mortgage, your DTI ratio should be less than 43% and no higher than 50%. Lenders will also like to check if your house expenses, covering your mortgage, property taxes, and homeowners' insurance, will not exceed 28% of your gross income monthly.
Check Your Credit Reports
Before you even get into the mortgage application process, it is best to take it slow and check out your credit reports first. Your credit card balance will play the main role in getting a good deal on your home loan, or even getting approval in the first place. Step one is to start pulling credit reports from some of the major credit bureaus. There are federally approved websites that are allowed to give free credit reports only once per year. After you get the reports, it is time to review them and make sure there are no errors or accounts that are not yours listed, which may considerably damage your credit. You must check if everything is right with the reports, and if you find any kind of errors, you need to instantly correct them to avoid harming your credit score.
Buying a new home is a huge step toward the future, and it is a serious step forward you are willing to take. However, you need to bear in mind that the house is a seriously expensive investment, and unless you are swimming in a pool of money, you will have to take out a mortgage. It is a long and nerve-wracking process, so being prepared for it will do you well.
