Unless a person has a mountain of cash lying around, chances are they will need a loan to purchase a home. Before searching for a home, it is wise and financially responsible to prepare and determine what is affordable. There are 3 important items that a potential mortgage lender should consider before applying for a mortgage.
- Consider Renting First
Renting may give the lender a a sense of what homeownership is like without a full commitment. When an item breaks or needs repair, pay particular attention to what goes into the repair to get a sense of what it would take to fix it unassisted. If possible, ask the landlord for the bill.
Secondly, renting helps to show mortgage lenders that an applicant has what it takes to make a monthly housing payment consistently.
- Check Credit Scores and Credit Reports
This is often given, but seldom taken advice. It is one of the most important items on the list. A person’s credit score and debt ratio play heavily on whether that person is approved for a mortgage. Mistakes on credit reports are more common that people think, so pull your credit report, read it thoroughly, and challenge any unusual or unknown credit charges. In addition, once a person becomes aware of their credit score, they can work to improve it which will save money in the long run. The higher the credit score the lower the mortgage rate. This can equate to hundreds if not thousands of dollars in lower mortgage payments and overall interest paid.
- Pay Down Debts
The debt-to-income ratio is the top way that lenders measure a person’s ability to manage any payments made every month when determining if a person is approved for a qualified mortgage. In fact, studies show that the higher debt-to-income ratio is for a prospective borrower, the more trouble they will have paying back the monthly mortgage payment. Most lenders go by a 43 percent debt-to-income ratio as the highest ratio accepted to become qualified mortgage borrower.
To determine the debt-to-income ratio, simply add up every monthly debt payment (including child support and alimony payments) and divide it by the gross monthly income (income before taxes and other deductions are taken out). If this number is 43 percent or less, you will more than likely qualify for a mortgage. Then, the credit score will determine the interest rate paid on the loan.
Actively paying down debts, curbing spending, working on improving credit scores, and getting the debt-to-income ratio below 43 percent are all helpful ways to ensure that you are fiscally ready for a mortgage.