Recent data from the National Association of Realtors (NAR) shows that the cost of buying a home has increased by 55% in 12 months. For an ordinary citizen, it may not be easy to raise funds to purchase a home from income, investments, and savings. Therefore, taking out a mortgage is a way for many Americans to fulfill their dream of home ownership. If you are considering a mortgage, read on to learn 4 things to consider.
Know Your Credit Score
Your credit score is key in getting a mortgage since it measures your financial history and shows lenders your likelihood of paying a debt. A high credit score suggests you're a low-risk applicant, which may increase your mortgage approval odds. On the other hand, a low credit score shows you're a high-risk borrower. By knowing your credit score, you can estimate the prospects of approval, and if low, you can take the necessary steps to improve it. For instance, build credit with paying your utilities, close open credit accounts that could attract charges, and consolidate existing debts.
Compare Different Lenders
Before proceeding with your mortgage application, it's important to shop around and compare your options. There are different mortgages available from lenders, which could help if you know the differences between them. For example, some mortgages have fixed interest rates while others have variable rates. Some require a large down payment, while others have more flexible terms. By doing your research, you can be sure that you're getting the best deal possible on your new home.
When applying for a mortgage, you need to get a pre-qualification from your lender, which is different from approval. Typically, prequalified means the lender is willing to advance money if you meet certain requirements. Depending on your credit profile and macro factors such as inflation, the lender may analyze how much you can borrow and your interest rate. Mortgage approval may demand a more extensive financial review, including your job history, credit history, and current debts.
Know Your Debt-Income Ratio
Your debt-to-income ratio is the proportion of monthly income spent on debt. If you earn $6,000 a month and pay $500 in debt, your DTI ratio is 8.3%. Typically, lenders prefer a DTI below 36%, and you may not qualify for a mortgage if it's greater. To improve your DTI, you could increase your income or pay off existing loans.
Worth noting minor budget modifications might affect your DTI ratio. For example, If you have $500 in credit card debt and can pay off $50 each month, you'll be debt-free in 10 months and have a lower DTI as long as you don't take out more debts during the repayment period. Knowing your DTI ratio before getting a mortgage gives you an idea of your loan eligibility and borrowing capability.
Taking out a mortgage is a life-changing decision for most people because you'll be paying money toward your home ownership. By keeping the above tips in mind, you could increase your chance of approval. Finally, you can get help from a financial advisor as you prepare to apply for a mortgage.