Are you ready to stop living in apartments and purchase your first home? If so, know that it is important to be financially ready for this big change in your life. These three tips can help ensure that there won’t be problems when you apply for your mortgage.
1. Get a Copy of Your Credit Report
You do not want to run into surprises when it comes to debts you don’t know about. That’s why it will help to get a copy of your credit report, so you know exactly what your lenders will see
There are actually three different companies that you can get a credit report from, Experian, TransUnion, and Equifax. You can request a copy from each of these companies once a year without it affecting your credit score.
It is important to pull a credit report from each company so that you can catch any potential discrepancies. You do not know which company a lender will pull your credit report from, which is why it is so helpful to look at what each company reports.
Any problems should be reported to the credit-monitoring agency immediately. For example, you may have a debt listed which was already paid off, or your report may be missing lines of credit. These kinds of mistakes can take a long time to correct, so you should investigate these problems first.
2. Save for a Large Down Payment
Lenders will like to work with homebuyers that have large down payments saved for their mortgage. A large down payment shows that the buyer is capable of saving money for a big purchase, which could make them more likely to or able to meet the monthly mortgage payment.
It is becoming more common for banks to want a 20 percent down payment, but it is not always necessary depending on the type of loan you get. However, regardless of if a high down payment is necessary, there are many benefits to getting a mortgage with a large down payment.
For example, a big down payment will get a better interest rate on the home, which helps you save money that would otherwise be paid towards interest. In addition, when you have a larger down payment, your loan is smaller which means you will pay less interest over time. Also, a 20% down payment will not require you to pay for private mortgage insurance, which saves you money every month.
3. Eliminate Your Debt
Another financial factor that lenders look at is the debt-to-income ratios of everyone applying for the mortgage. This ratio is based on how much money you make, your existing financial obligations, and what your proposed mortgage would be.
For example, consider a monthly budget where you are making $60,000 a year, or $5,000 per month, before taxes. The lender will consider all your current debts, such as a $300 car payment and $300 student loan payment, and then factor in a proposed home loan that could total $1,500 each month. These figures have a 42 percent debt-to-income ratio, which is good enough to qualify for a mortgage.
Most lenders look for people to have a debt-to-income ratio of 43 percent or less in order to approve them for a loan. If your debt-to-income ratio is too high, then you’ll want to take steps to eliminate those debts. When you have the cash on hand, you can pay off the rest of your car payment so that the debt is gone.
For more advice about preparing to buy a home, speak with one of our experienced, local agents at RE/MAX Space Center.