Whatever the case might be, be sure to choose a mortgage that best fits your needs, while being conscious of the interest rate and mortgage type.
So before you visit your mortgage broker, consider these five mortgage tips, modified from an ABC News’ article.
Tip 1- Consider your debt to earning ratio
Before applying for a mortgage loan, evaluate your overall debt. Remember that debt brings down your ability to borrow money to a ratio of 2:1. Hence, if your overall debt is greater than 10 percent, your liabilities (i.e. car payment, student loans, credit cards, etc.) might adversely affect your ability to qualify for a loan or limit the amount of mortgage that you can borrow. Thus, it is advisable to pay off a portion of your debt before moving forward with your mortgage application.
Tip 2- Evaluate Your Income
When applying for a mortgage loan, don’t forget to evaluate your income as it plays a pivotal role in the lending process. According to Scott Sheldon from rent.com, it is generally required for a person to earn approximately $40,000 per year and be able to support a house payment of roughly $1,500 per month. Be aware that your income is one of the top factors that can affect your loan process— your overall debt is also a huge contender.
Tip 3- Be Wary of Down Payments and Closing Costs
Gone are the days, when potential homebuyers were able to buy a home without a down payment. Nowadays, homebuyers are required to put down at least 3.5 percent of the purchase price. Hence, if a home is valued at $200,000, you will expect to have a down payment of roughly $7,000. Similarly, closing costs make up 3 percent of the purchase price, thus, if your home is valued at $200,000, you will have to pay an additional $6,000, totaling to a total of $13,000 to make your purchase.
Tip 4- Evaluate Your Employment History
Quitting or changing jobs might negatively affect your ability to be approved and potentially raise a red flag to lenders. Whatever the case might be, avoid changing or quitting jobs before submitting your mortgage application. Having an unstable work history might be a recipe for disaster when attempting to purchase a home.
Tip 5 – Check Your Credit Score
Having less than stellar credit due to bankruptcy, a short-sale or a foreclosure might significantly stall your home buying process. In many cases, it might take up to two or three years for your credit to improve. If that’s the case, Sheldon from rent.com, suggests paying off any outstanding debt and cleaning up your credit scores. Sheldon also recommends to periodically check your credit scores through AnnualCreditReport.com or FreeCreditReport.com.
Before you decide to take out a mortgage, reevaluate your situation and look at the long-term prospectus of what the obligation means over time. It is pertinent to make the right decision, for it can drastically affect your lifestyle. When shopping for the best mortgage rate, make sure to consider your household cash flow, lifestyle and debt.
Related: Mortgage Mistakes to Avoid
Photo credit: Svilen Milev