Making the decision to buy a home is both an exciting and terrifying time. Choosing the right mortgage is just as important as finding your dream home.
Home sales are on the rise. Statista projects that over 6.3 million homes will be sold in 2018. Yet, there was a total of $9.9 trillion dollars in mortgage debt at the end of 2017. This equates to an average balance of about $137,000 per person! With such high home costs, make sure you’re preparing so you’ll get the best deal for your situation.
What Factors Help You Qualify For Mortgages or FHA loans?
There are many financial factors for home buyers to get in order before applying for a mortgage that can help ease stress in the buying process. Properly preparing for a home purchase increases the chances you’ll get a favorable loan. It also allows you to prevent any unplanned purchases and save thousands of dollars in interest payments.
Follow this checklist before applying for a mortgage or FHA loan:
- Save Up For A Down Payment
A down payment covers a percentage of the total sale price. After a down payment, the rest of the house is usually paid off in monthly installments. Determining how much to put down is a big challenge.
Generally, you can choose how much money you want to put toward a down payment. Some homes have a minimum percentage needed to close, and anything extra is a benefit to you in the long run.
The Consumer Financial Protection Bureau states that 20% down is the average for most homebuyers. Although it seems challenging to save for, especially depending on the price of the home you want, putting down 20 percent of the total home cost upfront has a lot of benefits. Remember that the less money you put down upfront, the more money you’ll pay in interest and fees over the life of the loan.
Develop a budget where it’s possible to put aside some money each month to hit your goal! For example, a $400,000 house means you’d have to put $80,000 down for a 20% down payment. While $80,000 is a lot, putting $1,500 a month in savings for 2 years will have you almost half of the way towards the goal. If you’re moving in with someone else, tell that person to do the same, and the down payment would be covered in 2 years.
- Calculate Your Debt-to-Income Ratio
One factor that loan issuers look at is your debt-to-income ratio. This ratio describes the relationship between any of your monthly debt payments and your income. Usually a debt-to-income ratio of 45% is the highest ratio a homebuyer can have to qualify for a mortgage.
If you want to figure out your percentage, add up any monthly payments. These include credit cards, loans, and housing.
Once you get that number, divide it by your before-tax income. Leave out utilities, food, and other living expenses.
If your debt-to-income ratio is too high, pay down outstanding loans and credit cards you may have to lower it.
- Have A Record of Employment
Mortgage providers turn to your job history as an indicator of whether or not you’ll qualify for a loan. Loan providers give more favorable consideration to someone working in the same job for two or more years. Someone who has hopped from job to job in a short period of time is seen as a riskier borrower.
The Largest Factor
Credit scores are the largest factor credit lenders use to determine your worthiness of a home loan. These scores reflect on your past behavior with other loans, credit cards, and financial products, which shows how risky you are as a borrower.
Your credit scores will closely correlate to your rates on a mortgage or FHA loan.
For conventional mortgage loans, credit scores above 700 generally qualify for a good rate. If your scores are above 780, you’ll get the best rate possible! If you find your scores are below 700, you will more than likely receive an average rate. To get a higher rate with a lower score, put more money on the down payment.
For FHA mortgage loans, credit scores of 620 and above qualifies for a mortgage loan with 3.5% down. Take note that FHA lending standards aren’t as strict as conventional loans. For instance, if your scores are below 620, you may still qualify with a 10% down payment.
If your credit scores aren’t where you want them to be, there are ways to improve them over time. Understand what makes up credit scores and the ways to build credit to secure a better rate on a mortgage or home loan.
What Makes Up Your Credit Scores?
Although there are many misconceptions, every person has many credit scores, not one. Your scores may be different from one another, but there are main categories that affect each score.
Payment history is the most important, as it counts for 35% of your FICO scores. Late payments, collections, bankruptcies, or other negative payment histories hurt your scores.
30% of FICO scores are your amounts owed, or how much debt you’re carrying across your accounts. If you’re carrying a lot of credit card debt, your scores will suffer. This is why maxing out credit cards quickly drops your scores.
The last 25% of your scores are made up by your credit file age, a variety of accounts, and new credit applications.
Credit file age means how long you’ve had your credit accounts. The longer you’ve had credit accounts open, the older your credit history will be and the more points you’ll earn in this category.
Having a variety of different types of accounts shows a healthy, diverse mix of credit. A variety of credit includes credit cards, car loans, and mortgage loans. Having only one type of account won’t earn you as many points as showing that you’re able to maintain a variety of account types.
Your recent searches for credit make up the last part of your credit scores. Every time you apply for a new card, for example, a new hard inquiry is added to one or more of your credit reports. In general, the more inquiries you have, the riskier you’ll look to lenders. If you have more than about 5 in a short period of time, it can look like you’re desperately shopping for credit.
How Can You Improve Your Credit Scores?
Now that you know what makes up your credit scores, how can you improve them? Aim to excel in the points that make up your scores.
Use any credit accounts under your name with discipline. If you have credit cards, make sure to always pay your accounts off in full by your due date every month. Remember, credit cards should be free. Paying interest and late fees mean you’re using your card irresponsibly. Credit cards also come with many rewards and benefits, such as earning points, providing fraud protections, and insurance for trips you book on your card.
If you happen to have credit card debt, develop a plan to pay it down straight away, since your amounts owed make up 30% of your scores. Treat other debts like student and auto loans seriously, as well. Although they might be difficult to pay in full, they’re still accruing interest. Pay as much as you can monthly on these accounts to reduce any outstanding debts. Doing so benefits your scores.
Ready, Set, Apply
Now that you understand what affects your credit, come up with and execute a plan to develop it. Start putting aside some money for a down payment on a house. Create a checklist of the different factors that will help the process go smoothly and easily. Once you’re satisfied with where you are, you’re ready to look for your dream home and qualify for a mortgage or FHA loan!
Have any questions? We’re here to help.