For many of us, buying a home is one of, if not the, biggest financial decision we will ever make in our lives. It’s no surprise then why applying for a mortgage loan isn’t just a matter of walking into the bank, filling up some paperwork, and walking out with the money.
Unfortunately, first-time homebuyers will have to go through a lengthy and often rigorous process to have their mortgage applications approved. What you can do, however, is improve the chances of that happening by following these strategies.
Figure Out Your Mortgage Budget
Before you can talk to a mortgage officer, you first need to figure out how much you can afford to pay in monthly mortgage payments and how much you are comfortable paying, yes, there’s a difference.
A good rule of thumb is to take your total mortgage payments and check if it’s more than 35 percent of your gross income. For example, if your annual income is $120,000, your monthly mortgage payments should not exceed $3,500 a month.
A safer threshold, however, is shoot for 25 percent of your gross income, which should give you enough wiggle room when it comes to budgeting.
Get a Job and Keep It
Lenders love seeing a stable work history on a borrower’s record. Before a bank lends you money to buy a house, or any other property for that matter, they naturally want to make sure you can pay back your loan. If your work history shows that you don’t have a consistent job, lenders can’t be certain that you have the capacity to make monthly mortgage payments. Maintaining a steady job also shows you have the maturity and mindset to make a long-term commitment, which is what your home loan will be.
Cut Your Debt
Another factor that will affect your ability to take on a mortgage is your current debt situation.If you have existing credit card debt, a car loan, or any other existing loan, it’s best to try and reduce these as much as you can before applying for your mortgage. While it’s next to impossible to have zero debt in today’s economy, the less debt you have, the better your chances of getting your mortgage application approved.
Moreover, the higher your debt, the lower your credit score will be. This, in turn, will affect your chances of getting your mortgage application approved. More about this in our next point.
Protect Your Credit Score
But being in debt is not the only thing that will impact your credit score. Things like being behind on your bills payments, co-signing on loans, and applying for too many credit cards will all knock down your credit score down by more than a few points. And remember, lenders tend to look for scores in the high 600s. In fact, what you know as subprime mortgages are actually loans made to borrowers with credit scores below 660.
When it comes to maintaining a good credit score, the trick isn’t so much about what you should do, but more about what you shouldn’t. Learn more about protecting your credit score in this guide.
If you would like to learn more about the basics of home loans and how to apply for your first mortgage, get in touch with mortgage advisor Chris Lamm for a complete discussion on mortgages and your loan options.