3 Tips to Help You Prepare for a Mortgage

 

Buying a house is one of the largest purchases you’re likely to make in life. But even though purchasing a home is exciting, it can also be very confusing especially if you never bought a piece of property before. From looking for the right type of home to applying for a mortgage and making an offer, there are many factors you need to consider for a smooth home buying experience. Because there is plenty you can do to improve your chances of getting a mortgage, we’ve put together this quick list of the 3 most important tips on how to prepare for a mortgage.

Tip #1: Start Early

When it comes to buying a home with the help of a mortgage, specific things, such as working out your budget, improving your credit score, understanding how lenders operate so you can boost your chances of a mortgage approval, and finding the right home for your family, often require a lot of time.

The credit score is one of the most important factors, even more important than the down payment. While there are different mortgage products with various down payment requirements, an excellent credit score is an absolute must in order to qualify for a mortgage with a lower interest rate. Currently, there are 5 credit score ranges:

  • Excellent: from 800 to 850;
  • Very good: from 740 to 799;
  • Good: from 670 to 739;
  • Fair: from 580 to 669;
  • Poor: from 300 to 579.

The majority of lenders currently require a minimum credit score of 620. But if you’re able to improve your credit score so that you move up from one score range into another before applying for a mortgage, the lender may consider offering you a lower interest rate.

Although mortgage rates are currently low, even a 1% difference can translate into hefty savings over the life of a 30-year fixed-rate mortgage. Let’s assume that you intend to take out a 30-year fixed-rate mortgage to buy a $300,000 home. If you put down 20% ($60,000) on the home, you’ll have a $240,000 mortgage. While an interest rate of 4.5% will translate into a monthly mortgage payment of $1,216, however, with a 3.5% interest rate you’ll end up paying $1,077 a month*. The 1% difference in the interest rate reduces the monthly payment by $139, which might not seem like a lot of money. However, the 1% lower interest rate means you’ll pay roughly $50,000 less in interest over the 30-year term.

Tip #2: Lower Your Credit Utilization Ratio

Regardless of the type of mortgage, you intend to get, whether it’s a conventional, VA, or FHA-insured mortgage, your credit utilization ratio will play a huge role in whether or not you get approved.

In short, the credit utilization ratio, also called debt-to-credit ratio, indicates how much credit a person uses compared to his or her credit limit. Let’s say you have two credit cards: one with a $10,000 limit and $3,000 balance, and another one with a $6,000 limit and $750 current balance. To find your credit utilization ratio, divide your total balance ($3,750) by your total credit limit ($16,000) and multiply the result by 100 to get the percentage. Considering our example, the credit utilization ratio is 23.43%. In general, most lenders prefer a ratio below 30%.

Why is credit utilization important? In a nutshell, a high ratio could indicate you’re having trouble paying your bills on time. Furthermore, this ratio is an essential factor in your credit score. The lower your credit utilization is, the higher your credit rating. The credit utilization rate should not be confused with the debt-to-income ratio. Lenders consider both these ratios before approving mortgage applications.

Tip #3: Make Payments on Time

If you don’t have a history of on-time payments, it’s critically important to begin establishing that history as you prepare to get a mortgage. Because most lenders have recently adopted stricter policies about late payments, staying current on your rent, utilities, credit cards, car loans, student loans, and other financial obligations will have a major impact on your ability to qualify for a mortgage. Besides adversely affecting your credit score, a history of late payments could lead lenders to consider you a riskier borrower, which may translate into a higher interest rate. Furthermore, some lenders automatically deny the borrowers who have a late payment history, even if they’ve never missed a payment entirely. 

Preparing for a mortgage may seem like a hassle. But if you follow the above tips, getting a mortgage can actually turn into a simple and incredibly rewarding journey. To begin your mortgage application today, access our online form or contact our experienced mortgage brokers!

*The monthly payment amounts don’t include homeowner’s insurance and property tax, which could raise the monthly mortgage payments substantially if the home is located in a high-tax area.

Checklist to Buying a Home

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