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Considering a mortgage?
Nowadays, most people cannot afford to buy a home using cash. That’s way, first-time buyers, in particular, need a mortgage to purchase the desired property.
According to a 2020 report by the National Association of Realtors, first-time home buyers comprised 31% of all US homebuyers in 2020, which is a 2% drop from the previous year’s share of first time owners. The period between 2003 and 2005 recorded a uniform 40% share of first-time home buyers. Since 2011, the share of first-time home buyers has not risen beyond 40%.
So far, so good. However, those who have already been through this process know that it is not a piece of cake. Most borrowers just search on the net or contact different banks without having a concrete idea. The application process requires patience and good preparation on your part.
What if the answer to your application is “No”?
You have the right to ask yourself this question since banks decline a large number of applications. Despite the fact the approval of your application depends on many factors, you can become an active participant in the process.
In this article, you will find some precious advice on how you can improve your chances of getting a mortgage. Let’s follow these simple steps and increase your chances of approval.
Step 1: Improve Credit Score
Presumably, your credit score will play the biggest role in determining your chances of getting approved. Typically, first-time buyers would need a credit score of at least 650 to qualify. Keep in mind that this may vary depending on the lender and your situation (other loans, income, history, etc.) If you have a good credit score (, you shouldn’t be lying on the beach and waiting to be approved. Get some work done to increase it even more.
A good credit score might assist you in obtaining a mortgage with favorable terms. Lenders analyze your credit score to identify how responsible you are with credit and how much credit you have used in the past. The higher your credit score, the easier it is to get a mortgage authorized and at a cheaper interest rate.
If you want to get approved quickly and on better conditions, you should aim for a FICO credit score of 700 or higher. While a credit score of 620 can qualify you for a traditional mortgage, a credit score of 700 to 850 will guarantee you a better interest rate and conditions.
Lenders often keep track of borrowers' credit ratings, and any changes in credit scores can affect your interest rate. A few points in your credit score might mean hundreds or thousands of dollars in mortgage payments, saving you money in the long run.
Here are some tips to make it happen:
- Build your credit history – It can be difficult to get approved for a mortgage if you don't have a lot of credit history. Opening a secured credit card with a low credit limit is a good idea. Secured cards require you to have an amount of money in your bank account that matches the card's available credit.
- Pay down your revolving credit balances – you should pay more than the minimum amount each month if you have the funds to do so. Working on your revolving debt will help you maintain a low credit use rate, which can help you improve your credit score. It's preferable if you can pay off your balance each month as quickly as possible. You can also make many payments toward your debt throughout the month to keep your balance low and make it easier to manage your spending.
- Pay attention to credit utilization – the amount of revolving credit you're utilizing divided by the amount of revolving credit you have available is your credit utilization rate. It accounts for 30% of your credit score and is sometimes neglected as a way to raise your score. Most people associate revolving credit with credit cards, but it also encompasses personal and home equity lines of credit. A decent credit utilization rate is never more than 30%. If you have a $5,000 credit limit, you should never use more than $1,500 of it.
- Don't apply to multiple accounts – while you may need to open accounts to enhance your credit score, you should try to keep your credit applications to a minimum. Each application can result in a hard inquiry, which can lower your credit scores slightly, but inquiries can build up and have a compounding effect. Opening a new account reduces the average age of existing accounts, which can lower your credit scores.
- Review your credit report – each of the three credit reporting agencies is required to provide you with one free credit report per year, and requesting one has no effect on your credit score. Examine each report thoroughly. Any inaccuracies you identify should be challenged. This is the closest thing to a quick credit repair you can get. According to a government research, 26% of customers make at least one potentially major error. Some are basic errors, such as misspelled names, addresses, or accounts held by someone with the same name.
- Make Payments on Time – Missing or late payments will certainly have a negative impact on your chances of getting approved. This does not only include loan payments but all sorts of bills. Rest assured, your lender will check this out. Also, having already been through the first step, you know that this will lower your overall credit score.
Step 2: Make a Larger Down Payment
A down payment is the initial amount of money a borrower should pay when purchasing something on credit. When we talk about mortgages, the down payment is usually around 20% of the property’s value. Of course, it depends on how much the borrower can afford to pay.
A typical home buyer in the United States puts a down payment of less than 20%, based on a report from Zillow in 2019. This chart shows that 56% of homebuyers in 2019 paid a down payment of less than 20%, compared to 39% of homebuyers who paid at least a 20% down payment
The rule is simple: the more, the better.
If you pay 25% or even 30% down payment, the chances of getting approved increase a lot. This shows your commitment as well as financial discipline. It means you are a reliable borrower. In addition to that, this means that the amount of money you actually borrow will be lower. The higher the loan value, the higher the risk for the lender and the more you’ll end up paying in interest.
If you cannot afford to make a down payment of 20%, you will have to pay for a Private Mortgage Insurance (There are more ways to avoid the PMI). So, a larger upfront payment will also save you this extra cost, which will be added to your monthly payment. Only if you take out an FHA mortgage (a loan insured by the Federal Housing Agency), you will be able to go without this mandatory insurance.
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Step 3: Understand Lenders Requirements
You must understand the basics of how lenders make lending choices in order to have the best chance of being accepted for a mortgage. Each mortgage lender has its own set of rules and eligibility standards that they use to determine who they may lend money to and what types of properties they can finance. Their underwriting criterion and lending scorecard are the terms for these.
The borrower's and property's situations, as well as the lender's affordability regulations, are all considered in the underwriting process. For borrowers, this comprises the amount of money they wish to borrow, their income and work status, their existing debts, any previous late or failed debt repayments, and their deposit amount. You must also meet the lender's affordability requirements, which are determined by your income, mortgage fees, and other expenses. The lending scorecard is a collection of regulations that are determined by your credit score and history.
Because lenders require a lot of paperwork as part of the mortgage approval process, it's a good idea to gather all you need before you apply. What you'll need is the following:
- Income verification – You must first demonstrate that you have sufficient money to cover your mortgage payment. Tax returns from the last two years, as well as recent W-2 forms or pay stubs, are likely to be requested by lenders. If you're self-employed, you'll have to rely on 1099s or profit and loss statements from the previous two years to prove your earnings. If you get alimony or child support payments, you'll be required to present court orders, bank statements, and legal documentation proving that you'll continue to receive such payments.
- Liabilities – Lenders may also request paperwork for outstanding debts such as credit card balances, student loans, or existing home loans.
- Asset proof – Additional assets, in addition to income, can assist you in obtaining a mortgage. Expect to supply bank statements from the last 60 days for checking and savings accounts, retirement funds, and other brokerage accounts.
Because of these eligibility restrictions, determining which lenders are most likely to accept your mortgage application might be tricky.
Step 4: Control Your Spending
It’s a good idea to cut back on your spending prior to your mortgage application. Why?
Well, these days, banks check almost all details about a person’s financial situation. They can also go through your bank statements for a certain period to see your purchases. You can increase your chances of securing a mortgage by cutting back on your expenditures for six months before applying for one.
Lenders must demonstrate that your mortgage will be reasonable, which includes a stress test to ensure that you can make the payments if your interest rate rises to 5% or higher. The more spare income you have at the end of each month, the easier it will be to pass these affordability checks.
Reduced expenditure will enable you to save more for your deposit, perhaps saving you money over the course of your mortgage.
Don’t worry, they don’t care what you buy but rather they want to see whether you can afford a mortgage. They want to make sure you’ll keep making regular payments should the rates rise in the future.
Usually, lenders would like from you bank statements for the last three months. Keep in mind, that this differs from one lender to another (See how to find the best mortgage lender). Instead of buying things you don’t need, why not put some money aside for a larger down payment. Kill two birds with one stone.
Step 5: Manage Your Debt-to-Income Ratio
This one is very, very important. Simply put, this ratio measures the amount of total debt to your income. It’s calculated on a monthly basis. Let’s take a look at the formula:
We take the monthly debt payments and divide the sum by the gross monthly income of an individual. The lower the ratio, the better the result. It shows that you can manage your obligations quite well and they are just a small fraction of your income.
What is a good result?
The desired result is 36% or even lower. In addition, less than 28% of the debt should be mortgage payments.
A DIT between 37% and 49% is not brilliant, but still manageable. Somehow, you need to find a way to lower it up to 43%, which is usually the highest DIT that your lender will accept. Forget about anything higher than 50%. If your obligations are more than 50% of your income, it’s impossible to take out a new loan, let alone a mortgage. Make sure you ask the lender all the right questions and get ready for every scenario.
How can I lower my DIT?
Actually, there is no magic here. You can do two things to achieve this goal. The first thing is, of course, to lower the amount of debt – don’t purchase as many things as you want to. The second thing you can do is increase the money you earn. Perhaps, this may require a second job or additional hours at your current job.
Step 6: Consider an FHA or VA Mortgage
The US government helps first-time buyers to qualify for a mortgage. These are the so-called FHA and VA mortgages.
Any home loan that the Federal Housing Agency guarantees is known as an FHA mortgage. This program requires less strict qualifications. For instance, a person can qualify with a credit score as low as 580. Also, you can make a very small down payment – 3%. No minimum income is required and you can apply even if your DIT is close to 50%. In return, you will pay an extra charge each month – money which will be included in the monthly payment.
A VA mortgage is a program by the Veteran Administration which aims at providing assistance to service members, veterans and, of course, spouses. Some of the great perks are:
- 0% down payment for borrowers who qualify
- No Primate Mortgage Insurance needed
- Much easier to qualify for a VA loan than a conventional one.
The number of new home sales in the US reached 811,000 in 2020. According to the US Census Bureau, more than two-thirds of house purchases were financed through conventional mortgage at 561, 000. Homes purchases through cash only account for less than 5% of all the new homes purchased in 2020.
Step 7: Find a Cosigner
The last thing (or the first) you can do to better your chances are to find a person who is willing to cosign your application. A cosigner can help if your income isn't high enough to qualify for the loan you're asking for. Because their income will be factored into the affordability calculations, a cosigner can aid you. A cosigner's salary will be examined by the bank, even if the person isn't living with you and is merely assisting you with monthly payments. Of course, the most important factor is that your cosigner has an excellent work history, consistent income, and a decent credit history.
Both you and the cosigner must be aware of the financial and legal responsibilities that come with cosigning a mortgage loan. If you default on your mortgage, the lender has the right to pursue your cosigner for the entire sum. In addition, if you miss payments or default, both your credit score and that of your cosigner would suffer. A credit score is a numerical representation of a borrower's credit history, creditworthiness, and repayment ability.
Be careful, though: Missing or late payments will affect your cosigner’s credit score as well as yours.
Step 8: Set Your Expectations
If you can't get the mortgage amount you want and don't want to wait, you can buy a condo or townhouse instead of a house, which may be less expensive. Additionally, choosing a smaller home with fewer bedrooms, baths, or square footage, as well as moving to a more remote neighborhood, may give you with more cost-effective possibilities.
You could even relocate to a different region of the country if necessary, where homeownership costs are lower. You may be able to trade up to your ideal property, neighborhood, or city as your financial condition improves.
Nowadays, purchasing your own home is no mean feat and people often need a loan to do it.
Even though you need to meet (sometimes quite strict) criteria, you can always actively participate in the process. Certainly, there are quite a few things you can do to significantly improve your chances of securing a mortgage. Having already been through them, you do realize how important each and every financial decision you make is. Brace yourself and follow the steps, and the “Yes” will be waiting just around the corner.
Yes. It's not a bad idea to ask lenders or brokers if they can offer you better terms than the ones they originally gave. You can also inquire about their ability to beat a competing lender's offer. For instance, you could:
Request that the lender or broker eliminate or reduce one or more of their fees, or that you accept a lower rate or fewer points.
Check to see if the lender or broker is agreeing to drop one cost while increasing another — or to cut the rate while adding points.
This will depend on the current market rate and your circumstances. The benefits of a fixed rate is that you can know exactly how much you will be paying each month. However, if the current market base rate is high, you may find that you will be paying far more when the base rate drops after months or years.
Variable rates tend to be more flexible, as your mortgage payments will decrease when the base rates drop. However, if the base rate spikes, your payment will also go through the roof.
To make the decision which is best for you, consider whether you are prepared for the risk associated with fixing your rate now. Look at historic rates to see if the rates typically drop far below the fixed rate on offer now to decide whether it is a good option.
Use an Fixed Vs ARM mortgage calculator to compare between the options and understand which of the, is better for you.
The most common mortgage terms are 15 and 30 years, but there are lenders that offer terms that are shorter and longer than these.
Choosing the right mortgage term is a balance of affordability and overall cost. While you may want to keep your monthly payment affordable, taking on a longer term will mean that you pay more interest overall. So, think about your budget and what you can afford and aim to choose a loan term that allows you to manage your payment, while keeping the term as short as possible.
Use an 15 Vs 30 years mortgage calculator to compare between the options and understand which of the, is better for you.
Your ideal mortgage broker should provide access to a wide variety of products. You don’t want to deal with a broker who is tied to just one or two lenders, as you won’t get a full view of what is available in the entire marketplace.
A good broker will be able to scour the marketplace to find the best mortgage deal for you across all types of lenders, particularly if you have less than perfect credit.
Your mortgage rate will be determined by your lender according to your risk profile. However, when comparing mortgage rates, be sure to look beyond the rate. Be sure to compare like for like products. So, if you have a deal for a 15 year mortgage, compare it with other 15 year deals. If you’re not sure about the mortgage term you prefer, look at the monthly cost and overall cost of the loan.
You should also assess the deals to see if there are hidden fees or charges that can increase the overall cost. Some lenders impose hefty early repayment fees, which can become very expensive if you decide to refinance when the rates are more favorable.
If you have a low income, you may wonder how you can qualify for a higher mortgage amount, but there are a few things that you can do to increase your chances of approval.
Firstly, before you apply, try to work on your credit score. Having an excellent or good score, you will have better chances of approval. You should also try to pay down any other debt you have. This will not only lower your debt to income ratio, but will show that you are financially responsible.
You should also try to build your savings. In addition to having a down payment, it is a good idea to have the funds for your closing costs rather than adding them to your loan, which means that you’ll have more money to spend on your home. Savings can also show that you are more financially stable, as you have an emergency fund, so you’ll still be able to cover your mortgage payments if you have unforeseen circumstances, such as a job loss.
Another option is to consider adding a co-signer to your mortgage. Many lenders allow you to add a co-signer, and their financial and credit information can be considered on your application, which may increase your chances of approval.
Finally, look at first time home buyer programs. There are national, state and local level programs to assist first time buyers that could help you.
Mortgage underwriters can deny a loan for a number of reasons. The most common reason is that your credit score is too low, so you represent too high a risk for the lender. However, underwriters will also look at your debt to income ratio and loan to value ratio. If these are too high, the underwriter will deny your loan.
Other common reasons are queries about your finances. If your employment status has changed recently, you have a history of missed mortgage payments, there is unusual activity with your bank account or your down payment has come from an unknown source, it can be a red flag for the lender.
However, in some cases, the underwriter may deny your mortgage for reasons beyond your control. There could be problems with the property, such as a major issue uncovered during the appraisal or the appraisal is too low, which would cause approval issues.
Pre approval is similar to an application process, but some lenders can give you a decision in a matter of hours. You’ll start the process by completing an application form. This means that you will need to provide identifying information including your name, date of birth and Social Security number. These details will allow the lender to pull your credit. This will involve a hard inquiry that could impact your credit score. However, if you’re shopping with multiple lenders within a short time frame, the combined checks usually count as just one inquiry.
Once you submit the application, the lender will provide you with a loan estimate that details the pre-approval including the loan amount, type of mortgage, terms, rate and estimated closing costs.
With pre-approval, when you’re ready to move ahead with the mortgage the loan file will transfer to a loan underwriter to verify your documentation and ensure you meet the borrower guidelines.
When you have gone through Chapter 7 bankruptcy, it may still be possible to qualify for a mortgage, but you will need to wait. The standard timeframe to qualify for a conventional loan is a minimum of four years after the court dismisses or discharges your bankruptcy. However, there is more leniency with government backed mortgages, which you may be able to qualify for after three years.
Every lender has its own guidelines for the amount of time you need to wait to reapply for a mortgage after being denied. However, even if the lender does not have a specific timeframe, it is a good idea to wait approximately four to six months. This will allow your credit score time to recover from the hard credit pull. It will also provide you sufficient time to increase your credit score by improving your credit utilization ratio, show a history of on time payments and pay down your debt. These are all factors a lender will consider when making an approval decision, so use the waiting time wisely to increase your chances on your next application.