Buying a house isn’t like it used to be. In days gone by, all it took was one full-time wage to secure a lovely family home that you could raise your family in until well past retirement age.
These days, however, criteria for mortgage applications are stricter, and house prices have risen so much that in most areas, it is unfeasible to be able to buy a grand family home on a single average full-time wage, which is currently around $56,000 for men and just under $40,000 for women.
But buying your first home shouldn’t be a pipe dream. You can still get a foot on the property ladder if this is what you want. However, you need to put effort into being financially prepared to take a loan of this magnitude and convince lenders that you are a safe bet and will adhere to your commitments.
With this in mind, what do you need to know when preparing for a mortgage?
Why
Firstly, you need to be clear on why you are doing this. Do you want to buy a house, take on a mortgage, and commit to repayment for the next 30 years or longer?
Are you sure this is the right choice for you and your circumstances right now, and you know what you are getting into? Being confident this is the right choice for you will make the whole process easier because preparing for a mortgage isn’t easy.
Credit File
In the early days, you need to check your credit profile and make sure everything is correct, and there is nothing that is going to impact your ability to obtain a mortgage when you are ready. Three major credit agencies are Transunion, Equifax, and Experian. Check what each one holds about you and identify any mistakes. If there are any, rectify them, then look at factors that can pull your credit score down.
For most lenders, you need to be at a minimum of 620 (some lenders do loan to those lower but above 500), but ideally, you want to aim for 750 or higher for better terms and rates.
If you fall considerably below this, then you need to put effort into rectifying past financial mistakes and behaviors.
Down Payment
Typically, you need a 20% down payment plus money for expenses and costs that aren’t covered by your mortgage. This isn’t universal, though, and each lender has different requirements and allows for a 0% down payment. There are influencing factors as to the type of down payment a lender accepts; however, if you can aim to save 20%, this is going to help you out, as lenders prefer bigger down payments.
To find out how much for a downpayment you need to save, you can find out how much you can potentially borrow. A general rule of thumb is that you can loan 2x to 2.5 times your gross income. So, if you are bringing home $75,000 per year, this means you can go to a maximum of $150,000 or $187,500. On a $150,000 mortgage, you will need a $30,000 down payment for 20%, $15,000 for 10%, and so on.
Research Financing Options
Next, you need to research lenders and do your homework on all of the different types of mortgage plans available for buyers.
There may be a specific type of mortgage you can apply for, such as a VA Loan, FHA, or USDA Loan, or you might want to look into construction loans to build your home from scratch after purchasing the land. You might be able to benefit from tax breaks, grants, or federal assistance to help you fund your purchase, and knowing what your options are and what you are entitled to will help you get the best deal for your circumstances.
Check Your Lifestyle
While you are preparing for your mortgage, it pays to know what lenders will be looking for and what will impact your ability to obtain the best mortgage possible. Activities such as frequently changing your employment, making big purchases for nonessential items, evidence of gambling, and a high debt-to-income ratio.
Your grocery spending, household bills, credit card balances, and existing loans will impact a lender’s decision, so you need to look at how you live and what you spend your money on to ensure there are no red flags that will cause lenders to back out and take any offers off the table.
Take A Targeted Approach
Once you are in the best position possible and you are ready to apply for your mortgage, it’s best to take a targeted approach and not drag it to ut. What this means is that you are best making several applications in a two-week period, as this will only count as one hard search on your credit file rather than dragging it out over a more extended period. The more refusals you get, the harder it will be.
At this point, it can be worth using a mortgage broker to check over your application and guide you in the right direction. They can enlighten you as to what the lenders will see and how they will make their decision and put you on the right path to getting accepted. This can save you from being refused multiple times, having incomplete applications, or entering the wrong information. It will be an extra expense but one well worth making.
Don’t Shop
Something that is just as important as getting your application correct and accepted is not looking at properties before you have been accepted or pre-approved. This will only lead to frustration and disappointment, and rushing in before you are ready can lead to mistakes or taking offers that aren’t suitable for you. Taking on a mortgage shouldn’t be rushed, and looking for a home before you have approval and funds in place will lead you down this path.
Preparing yourself for a mortgage isn’t something you can do overnight. It is a lengthy process that needs your due care and attention. Take your time, be thorough, do your homework, and know what your options are before taking the plunge; you will thank yourself in the long run.
