When it comes to home buying it pays to be prepared. Here are 4 helpful steps that could make you a strong candidate for a great mortgage.
Knowing much how outstanding debt you’ve got, along with the associated minimum payments, can play a huge role in a mortgage approval. Put simply, the less debt you’ve got, the more you’ll be able to afford on your given salary, all else being equal. It can actually be a win-win to pay down debt prior to a mortgage application because it’ll boost your purchasing power and probably increase your credit scores at the same time. The result may be even more purchasing power thanks to a lower mortgage rate, which drives payments down and increases affordability.
Avoiding unnecessary swiping (or now dipping) weeks and months before applying for a home loan can have a big impact. Your credit scores may drop as a result of more outstanding credit card debt. It’d be silly to make a small or medium-sized purchase that jeopardize your very large home purchase. The new debt may eat into your DTI ratio*, thereby limiting what you can afford, even if you pay off your credit cards in full each month. Best to just wait and make your purchases a month later, once your mortgage funds.
You’ll need financial assets for your down payment, closing costs, and for reserves, the latter of which shows the lender you’ve got money to spare, or a cushion if circumstances change. But it’s one thing to have these funds, and another to document them. You’re typically asked to provide your last two months of bank statements to show the lender a pattern of saving money. To make life easier, it could be prudent to deposit all the necessary funds in one specific account more than two months before application.
That way the money will be seasoned and there won’t be the need for explanation letters if money is constantly going in and out of the account. The ideal scenario might be a saving account with all the necessary funds and little or no activity for the past 90 days.
Try to determine your tenure ahead of time. If you know or have a good idea how long you’ll keep the property, it can be instrumental in loan choice. For example, if you know you’re just buying a starter home, and have pretty strong plans to move in five years or less, a 5/1 adjustable-rate mortgage might be a better choice than a 30-year fixed. It could save you a ton of money, some of which could be put toward the down payment on your move-up property.
*Debt-To-Income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
written by: Colin Robertson