Before you apply for a mortgage here are 6 steps you should consider to prepare your finances for mortage…
Fact: not everyone can afford a house and pay it in full. Most of the time, people will turn to banks and seek financial help. In fact, as of June 2018 alone, the U.S. Federal Reserve reported $14.988 million outstanding mortgage debt.
Here’s the thing: applying for a mortgage is not as easy as it seems. The housing crash in 2007 triggered the banks to loosen their minimum requirements and adjust interest rates to entice borrowers. Still, financial institutions still follow a checklist to ensure that they will be paid no matter what happens.
Before you submit your application, whether for a mortgage or even cash-out mortgage refinance, make sure you do these steps first:
Understand Your Current Financial Situation
How are your finances so far? Do you have sufficient savings and investment? What about existing debts?
Before you look for a bank that will finance your needs, make sure you know your current financial condition. Make a list of all your existing debts (this includes credit card debt) as well as how much you are earning every month. The difference between the two must show that you are still capable of paying for another loan.
This leads you to the next tip.
Check Your Credit Report
Now that you know your financial status, it’s time to check your credit standing before applying for a mortgage.
Keep in mind that credit report shows past and present financial obligations. Checking this ensures that your credit report is accurate and will only reflect the loans you applied for. In case of discrepancy, file a dispute on Credit Bureaus so that necessary corrections are made.
Lenders take credit report seriously. The better it looks, the higher the possibility of getting the best possible rate and terms for your mortgage.
Reduce Your Debt-to-Income Ratio
Also known as DTI, the debt-to-income ratio is a personal finance measure to compare the borrower’s debt payment as opposed to his or her overall income. Lenders use DTI as a gauge to determine one’s ability to manage monthly payments and repay existing debts.
Before you apply for a mortgage, it is highly recommended that you reduce DTI by paying existing loan obligations. Here’s what you can do:
- Prioritize loans that are either maturing early or with the highest interest rate.
- Get side jobs and use the money earned to pay for loans.
- In case you have several loans, consider debt consolidation so you only have one loan to worry about.
Doing these steps could not only reduce your loan but also improve your debt-to-income ratio as well.
Avoid Future Borrowings Other Than Your Plan For A Mortgage
The personal loan your bank is offering you looks tempting because of the added perks. Your credit card company also sent you a new credit card with a higher credit limit. Your best friend since you were five who are now working in a bank asked you if you want to try their new loan product.
Forget about all of these and focus on your mortgage alone. If you want to boost your chances of approval, then you need to slow down your borrowing since this could negatively impact your credit score. Plus, you are adding more financial burden under your sleeves. This will make it harder for you to get back up and pay off all your loans.
Keep your eyes on the prize.
Save Up To Make A Larger Down Payment
Yes, lenders will lend you money for your dream home, but they won’t shoulder all. In fact, they will only allow you to borrow a specific percentage from the total selling price and the rest will be shouldered by you.
This is why it is strongly advisable to save up first before you can apply for a mortgage. Set a money goal and make sure you allocate a specific portion of your income to meet that goal. Lenders prefer borrowers who can provide higher down payment, thereby giving you more room to negotiate mortgage terms like a lower interest rate. You get to pay less every month, which helps you save more in the long run.
Research On Mortgage Plans That Are Best Suitable For Your Financial Condition
This is why it is important to know your financial standing. Knowing where you stand gives you a better idea on where you are financially, which also helps you assess whether the mortgage plan offered is ideal to your situation. This will also help you decide on how to finance your mortgage.
For instance, if you want a guarantee that monthly amortizations remain the same throughout the duration of the mortgage given your current income, then the fixed-rate mortgage is your best option. On the other hand, if you prefer more flexibility in your payment options since you believe that the market will fluctuate, then an adjustable rate mortgage is the best way to go.
More importantly, always be realistic with the amount to borrow. You aim for the higher amount, but can you afford to pay for it every month? Knowing your financial standing will make it easier for you to know how much you should save, borrow, and pay.