Going ahead and applying for a mortgage without giving it adequate thought is insane. Gone are the days of simply heading to talk to your bank manager and they approve you straight away. Now, it’s as if you need to complete an assault course to qualify.
The important thing is to plan ahead when even contemplating applying for a mortgage. Preparation will increase the chances of your application being a success as will keeping these three key points in mind throughout the process.
1. Understand Your Credit Score
If you don’t have a good credit score, then forget your mortgage. Lenders check on this to determine if giving you the cash comes with a high or low risk. The higher the score, then the more likely the loan.
Of course, the difficulty is in understanding what is viewed as being a good score. The perfect rating is 850 but anything over 760 will increase the chances of them accepting your application.
If your score is between 700 and 760, then it’s still pretty good and lenders you'll find on Informeo will be quite favorable towards you. However, as your score drops lower, then the odds are against you. If you go below 650, then expect that rejection.
Find out your credit score and seek to improve it if required. There are different resources available online to help you with this.
2. Know How Much Of A Down Payment You Need
There are misconceptions when it comes to the size of the down payment that you need. According to a study by NerdWallet, almost 50% of people believe that you must have 20% of the sale value.
Now, while that is common across the board, it’s not something that is set out by law. Of course, if you can put down a larger payment at the outset, then you save in the long-term but thinking you must have 20% from your own resources can put you off trying to buy a property.
Sure, you have a better interest rate and avoid private mortgage insurance, but if you don’t have that cash then all is not lost.
Instead, various lenders will accept a much lower down payment. For example, FHA loans can result in as little as 3.5% or if you’re a veteran then there are options with 0% available.
Finally, consider the possibility of down payment assistance. There are thousands of options available across the country where you can get special help to get you on the property ladder.
3. Understand The Idea Of A DTI Ratio
The final point is your DTI ratio, and this stands for Debt To Income ratio. Basically, it determines your current debts and what you spend per month servicing them and how it compares to your income. They then do a calculation to get the ratio.
A lender will look at this ratio and prefer to see a very low number. The higher the number, then the greater the chance that the individual will run into problems with their payments. They also factor in the mortgage payment into the ratio to see if you can make the payments. You should aim for a ratio of below 36% to improve your chances.
If it’s higher than this, you either get a smaller mortgage or clear your debts first. By doing so, you will improve your chances of being accepted.
These three points are key to understanding the potential for your mortgage application to be accepted. The good news is that there are things you can do to improve your situation, so even if you find that your credit score is not that great, or your DTI ratio is over 50%, then all is not lost.
Instead, by preparing yourself in advance in this way, you build a better future for yourself by tackling these issues from the outset.
