Owning a home is a dream shared by millions of people. Investing in property that can be owned within 15 to 30 years of closing on the home makes more financial sense to many than continuing to rent and having little to show for it over time.
The first step to take when planning to enter the real estate market is to ensure that your finances are in order. Various factors will influence individuals’ ability to secure a mortgage, and these are some ways to make yourself more attractive to prospective lenders.
Check your credit report. Lenders will check your credit report before deciding if you are a risk or a safe bet for a mortgage. So it makes sense to check your credit report prior to speaking with a lender. The Federal Trade Commission says everyone can get one free credit report a year from each of the three credit reporting bureaus. If you split it up, you can get a credit report every four months so you are aware of anything that may adversely affect your ability to get a mortgage loan. A credit (FICO) score that’s too low may disqualify you from a mortgage. Each lender sets its own thresholds when they price and approve loans, but the higher your credit score, the better.
Improve credit standing. One way to improve your status in the eyes of lenders is to pay down credit card balances to reduce your credit utilization ratio. A high utilization occurs when there is a high balance in relation to the credit limit, says Business Insider. Also, it may be wise to avoid any credit inquiries through new credit card applications for several months before applying for a loan, as these inquiries can affect your score.
When people start to get pre-approved for mortgages, mortgage sales manager Christofer Wilhelm advised that they should make sure that their revolving debt limit stays below 25 percent and to make their payments on time as one missed payment can negatively impact your credit score.
“It can pick up anywhere from 25 to 40 points because a card is maxed out so that’s one easy thing that we’ll tell people to do is ‘hey, keep your credit card utilization down below the 25 percent mark and make sure that people make their payments on time. One missed payment can cost you, depending on the debt, can cost you between 50 to 100 points in your credit score and it’s much harder to recover from that so make on-time payments, limit your credit inquiries and keep your balances as low as possible,” Wilhelm said.
Be realistic about what you can afford. Do your homework and determine your target interest rate and monthly payment as well as what down payment you can afford. It will help you research potential lenders and provide an idea of what may be offered to you.
Wilhelm said that interest rates will have too many variables to determine what the client should be pricing off but in terms of affordability, that gets pushed back on the client to see what they can afford.
“A lot of people end up qualifying for more than what they want to spend monthly. It’s not a matter of how much you qualify for, it’s a matter of how much you want to spend and every person that’s applying for a mortgage or buying a house is going to have a different answer for that question. Some people are going to have certain savings goals, they want to go out to eat once a week, they want to stay home and make all their meals at home and end up saving a little bit more money so every family’s wants, needs and goals are going to be different so we want to make sure we are working within those goals,” Wilhelm said.
Pay bills on time. Paying bills promptly not only helps you avoid late fees, but also positively affects your credit. The financial resource The Mortgage Reports urges diligence when paying rent, as late rent payments can bar you from getting a mortgage. Lenders look at rent history as the biggest indicator of whether you’ll make mortgage payments on time.
These are some of the ways to make a prospective home buyer look better in the eyes of mortgage lenders. Individuals can speak with financial professionals about what else they can do to improve the possibility of securing mortgages at the best rates possible