First Step: Get Your Finances and Credit In Order
Your credit and financial situation will play the biggest roles when applying for a mortgage. It makes sense to give yourself the best chances possible by preparing them months in advance of buying a home. The first thing you should do is get your credit report and go over it carefully. Check for any errors, like debts you’ve paid off that are still showing up on the report, and debts that aren’t yours that belong to someone with a similar name to yours. Errors need to be disputed with the credit bureau and will help raise your credit score.
You also need to look at any weak points in your credit history that are bringing your credit score down, such as high-interest credit cards. If you are able to, pay down those cards and loans. It will help raise your score and will save you money on high-interest rates.
Debt-to-Income Ratio
Another important factor is your debt-to-income ratio or the amount of debt in comparison to your income. A high debt-to-income ratio is a red flag for lenders because it shows you have more debt than you do income and that you may not be able to handle your debts responsibly. Even if you have a good credit score, a high debt-to-income ratio can cause you to be turned down for a mortgage. A good debt-to-income ratio is 30% or less. Paying off high-interest-rate loans and credit accounts will help bring that number down.
Go Over Your Budget
Your next step is to have a look at your budget. Look for unnecessary debts that you can eliminate. This is an important step if you are serious about buying a home. Cutting things out, such as going out to eat, buying no-name brands when shopping, and forgoing a vacation are all ways that help you cut down on your spending.
One thing to keep in mind is that having some debt is necessary when it comes to lenders looking at your credit history. You don’t need to pay off everything and then close those accounts out. In fact, doing so can have a negative impact. Focus on getting the debt-to-income ratio lowered and fine-tuning your budget.
Collateral and Cosigners
In cases where your debt-to-income ratio is high, you can add collateral or a cosigner to the mortgage to make your application more appealing. Collateral would be something of significant value that mirrors the amount of the mortgage loan, for example, a car or another property. These need to be paid off in order for you to use them as collateral. Cosigning means having someone with good credit on the mortgage application. However, you need to be aware that, should you miss your repayments or go into default, the cosigner then becomes responsible for the debt. You could damage both your credit and theirs if you default.
Do Some Lender Shopping
We often see homebuyers make the mistake of not shopping around for a good mortgage package from other lenders. Going with your bank or the first lender you contact isn’t advisable because you may be missing out on a better rate. Using a mortgage broker is a good option though. A mortgage broker has access to many lenders, rates, and products you won’t find on your own, and works to find you a mortgage that suits your needs. You’re also protecting your credit rating because your credit report will only be pulled once, rather than several times with each lender you apply with.
Our advice is to start going over your finances and cleaning up your credit several months before you start looking for a home to buy. It will give you a chance to raise your credit score, as well as give you a better idea of what you can realistically afford when it comes down to mortgage repayments.
If you want more tips on how to improve your chances of qualifying for a mortgage, give our Maryland mortgage lender team a call today!
*This is not an offer for a loan or any type of extension. Eligibility for a loan or extension of credit from Homespire Mortgage Corporation is subject to completion of a loan application, credit, income, and employment qualification, and meeting established underwriting criteria. Rates are subject to change without notice based on market conditions. See Loan Consultant for information on program income limits, buyer contribution, area median income, debt requirements, and other application details.
*By refinancing your existing loan, your total finances charges may be higher over the life of the loan.
Homespire Mortgage Corporation | NMLS #183215 | Equal Housing Lender