With the New Year starting, it’s a great time to reflect on the good times of the past year and make new resolutions. If you are interested in making your dream of owning a home a reality, you will need to know how to improve your chances of being approved for a U.S. home mortgage.
Follow these tips to secure a low interest rate and finally invest in your own property:
Start saving for your down payment
Having a handsome sum of cash to pay for a home up front will increase the likelihood of approval and lower the interest rate on your loan. In addition, if you have more than 20 percent of the entire value of the home up front, you will not need to pay for private mortgage insurance.
If you don’t have 20 percent, Bankrate suggested partnering with Fannie Mae or Freddie Mac for an affordable home loan that matches your current resources. These government-sponsored enterprises allow for down payments as low as three percent of the purchase price of the home. However, you will need a strong credit score to qualify.
Make a plan
If you want to invest in a new home, start saving as soon as possible. Keep an account specifically for your down payment. Do not use the money for anything other than the purchase of your future home.
Determine a budget that allows you to save at a more rapid pace. Cut out frivolous spending and consider eliminating extra costs, such as cable or eating out every weekend.
Organize all paperwork
When preparing to apply for a home loan, make sure you gather all financial paperwork for the two months leading up to purchasing a home. Everything from tax returns to bank statements represents important documents you will need to send to your mortgage broker.
According to Money Under 30, some of the items you will need to be prepared to provide include:
- Monthly income
- Monthly debt
- Down Payment
- Credit history
Consider putting all items in a PDF format so you can easily send these documents to the appropriate parties whenever necessary.
Establish a budget
The size of the loan you are requesting also impacts your approval and interest rate. For this reason, you will need to know precisely what you can afford. According to Money Under 30, it is a good idea to keep your total housing payment under 35 percent of your gross income. This includes insurances, taxes and fees associated with your housing payments.
Consider using a home affordability calculator to help you determine how much you can spend on a new home. The last thing you want to do is default on a payment or lose a new house you can no longer afford to make payments on.
MyFICO indicated that you should always shop around for home mortgage loans. Getting offers from several lenders ensures you are getting the best rate possible for your unique scenario. It makes brokers and banks compete for your business, which typically means more savings for you and your family.
Obtain your credit history
Your credit history serves as a way for banks and mortgage brokers to evaluate your creditworthiness. Someone with a high credit score is more likely to secure a low interest rate for a home loan, while someone with a low score may not be approved at all. Low scores mean they are a riskier consumer, which is not appealing to brokers and banks.
Make sure you request a copy of your credit report so a low score or inaccurate items do not surprise you.
Put credit on hold
If you are looking to invest in a new home, you don’t want to make any substantial purchases or open any new lines of credit. This can impact your score negatively and leave you with a higher interest rate or no loan at all.
Applying for a new line of credit may also look suspicious to banks or mortgage brokers. If you must, draft a letter of explanation to provide to the lender.
Improve your credit score
U.S. News & World Report noted that if you find any errors on your credit score, you should report them. These can negatively impact your score and impede your ability to qualify for a mortgage in 2016. If you have questions about your credit report or how to repair your score, contact Lexington Law Firm for a free consultation.
If your goal is homeownership this year, evaluate your score and make it as high as possible moving into the New Year.
Exercise financial responsibility and make larger payments on your lines of credit. Also, do these more frequently. Making a habit of this now will lead to a more financially successful 2016, and it will bring you closer to your dream of homeownership.