A large part of making smart borrowing decisions involves getting yourself in the best shape financially before you apply. Whether you are applying for home financing or a loan to start your own business, taking the right steps to prepare before applying means you’re maximizing your chances of being approved. It also means you stand a higher chance of getting a better finance deal, including lower interest rates. Failing to do so puts you at risk of making one of the all too common first-time homebuyers mistakes like being unaware of your credit score, miscalculating your home-buying budget, or getting your heart set on a house before being preapproved for a loan/mortgage. Before you head online or approach a lender to discuss financing your first home, here’s what you need to do to give yourself the best start.
Break Down The Basics Of Your Home Financing Options
There are many different home financing options available to homebuyers, including a long list of mortgage options. However, not all of them will be the best fit for you. Before you leap into homeownership, become familiar with the types of mortgages or home loans out there. Each category comes with its own acceptance criteria, terms and conditions, and advantages. For instance, a 30 year fixed mortgage has a set interest rate and often lower monthly repayments, but also means longer repayment terms. Alternatively, an adjustable-rate home mortgage often has its interest rates locked in for five or 10 years, but also leaves you vulnerable to rate rises in the future. Do your research on the options out there, and don’t forget to utilize a comparison website to figure the best financing deals out there.
Work On Improving Your Debt To Equity Ratio For Six Months
According to Chris Hogan, a personal finance expert at Ramsey Solutions, one of the biggest mistakes first-time homebuyers make is buying a home when they have debt. Having the financial obligations of past debt can hamper your ability to keep up with mortgage or loan payments, and also reduce the amount you can borrow. Instead, as a part of getting ready to apply for home financing, double up on your efforts to reduce your debt to income ratio.
The way to do this is to either increase your income or reduce your debt. According to the Consumer Financial Protection Bureau, the maximum debt to income ratio should be 43 percent if you want to be approved for a qualified mortgage. However, financial advisors have always recommended staying at around 36 percent. Focus on paying down high-interest debt like credit cards or installment loans. Also, consider whether it is time to explore alternative income sources like a second job or side hustle. Aim to do this at least six months before applying so that your income streams are established when you do.
Stay Updated On Your Credit File
One of the first things a lender will check when considering your loan or mortgage application is your credit score. Any red flags on your credit file can delay a decision, increase the interest rate offered, or cause a lender to decline your application. Checking your credit score well before your mortgage application gives you enough time to work on correcting any errors on your credit file.
For U.S. applicants, you can get a free annual credit report from one of the three credit reporting agencies: Equifax, Experian and TransUnion. You can access this on AnnualCreditReport.com. If you do need to improve your credit scores, work on reducing your credit utilization balances, making your payments on time, and disputing any errors you notice on your credit file.
While you cannot guarantee approval in your home financing application, you can improve your chances by being prepared. Thinking ahead, working on your credit standing, and getting to know the best mortgage options out there gets you off to a good start – now and well into homeownership.