In a recent article, I shared with you tips for your first day of homeownership. It is a very exciting day as it translates into a new chapter in your life, at least for most millennials. But before you get to move into a new home, you must first pass the test of the mortgage which many young adults fail. Heather and I bought our home in 2017 while home prices were rising and since, home prices have stabilized a bit which may be a positive for home buyers. Moreover, sales unit have increased in 2018 and while there were 6.2 million home sales in 2017, that number is expected to jump to 6.3 million. So, if you are in the market for a new home, you may be thinking that it is the right time. However, we must also consider the other variable: mortgage rates. Rates have been on the rise over the past few months. Be cautious; incredibly high rate on your mortgage could wreck your finances.
Buying a home should not be a sudden decision. It is an important financial undertaking and unless you are financially wealthy or free, you should plan carefully for it. My experience working in the banking industry taught me that the majority of people look for loopholes and/or the easy path, however it always comes back to bite them. Then it is not pretty. While programs are great and helpful, my personal advice and opinion to be patient and wait for the right time – that is when you are in the financial position to afford a house.
For a banker, what does a financially ready applicant look like? Well, there are several factors that play into characterizing a perfect applicant. Nonetheless, there are three basics traits that you should have to attract the attention of lenders.
Good credit is indispensable
Ok; you saw a commercial on TV that clearly stated that you did not need a good credit score to be approved for a mortgage. Maybe that’s true but my recommendation is to be very suspicious of such claims and avoid them.
One of the biggest traits that a credible lender wants to see is an applicant who is responsible with their credit. They will determine this by taking a look at your credit history. You become a risky applicant when you have a tendency to miss your credit card or loan payments, when you are constantly late paying your dues. By the way, unpaid bills such as medical bills or phone bills can affect your credit score as well.
Millennials have the lowest credit score of all generations. This generation’s average credit score is 625 while baby boomers’ average credit score is about 709. If you are looking to qualify for a mortgage, 625 would not be a passing grade. Your goal should be to get above 700, and truthfully close to 720. This does not only make you a good candidate, it also allows you to have access to better rates.
Is your credit score currently in a bad shape? There are several ways to fix it. Mainly, it takes discipline. Sites such as https://repair.credit/ offer useful advice related to how to fix your credit.
A Sizeable Deposit
Generally speaking, the larger deposit or ‘down payment’ you can present to a lender, the better. You’ve probably heard that it is best to put down at least 20 percent of the price of the house for a conventional mortgage. It is not a requirement. However, less than 20 percent causes you to pay for a mortgage insurance. The disadvantage is that mortgage insurance costs a lot and consequently, your monthly payment is much higher.
Putting down a fairly large deposit on the home will save you money in the long run.
— Linear FS (@Linear_FS) June 7, 2018
A Good Debt-To-Income Ratio
I’ve ran into people who think a fairly high income should qualify them for a mortgage. That’s not always true. In fact, when you debt is too high compared to your income and assets, you instantly become a risky mortgage applicant. Lenders compare your debts to your income to determine a debt-to-income ratio. It is the sum of your monthly minimum debt payments (even you pay $150 on your credit card while the minimum required payment is $60, your debt-to-income ratio is calculated using $60) divided by your gross monthly income. When you are applying jointly with a spouse, the household income and debt will be considered. When the ratio indicates that you will most likely struggle to repay the mortgage along with all your other debts, forget about getting approved. So, it’s always worth reducing any outstanding debts before you apply for a mortgage.
When it was time to apply for a mortgage, Heather and I opted to work with a local lender. By local lender, I mean a lender that is not a major bank. This is a personal preference. Why? Because this is such a meticulous process and it is also very demanding when it comes to requirements, it is best to have access to your lender and their support staff very easily. I’ve worked for a major bank. Unfortunately, sometimes it is very hard to reach the right person in a timely manner. Moreover, major banks have so many other applicants that the level of customer service is reduced. This is not to say that there are exceptions as many homeowners have applied directly with lenders such as Bank of America, Capital One Bank, PNC Bank, etc.
If you want dedicated attention during your application process, lenders like http://backbaymb.com/ offer that.
Hopefully, I’ve shared with you many useful tips when it comes to applying for a mortgage. The most important trait that you should have is to be financially stable and this starts with your every day decision. Learn how to become a money-smart individual and you’re on your way to you bag your mortgage!
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