For most people, purchasing a home is one of the most significant commitments of life. This is the reason people take time to save as much money as they can and research a lot before investing. Finding a suitable home isn’t often an issue because the investors in the real estate sector keep building houses by the day. Your primary concern should be the finances.
One reliable solution you can consider is taking out a mortgage. While familiarizing yourself with the rates you also need to check how to apply and get approved for a mortgage, which is the most vital part of this process. However, this can be difficult for some, especially when lenders start to calculate loan-to-value ratio
Most potential buyers find this difficult, but your mortgage approval process can be relatively smooth with preparation. Knowing the key factors that affect mortgage approval and the amount to borrow is key. This piece will share fundamental tips to enhance your chances of getting mortgage approval for your dream home.
Check Your Credit Score Report
In recent times, credit scoring has become an essential requirement in the financial sector. Before any lender can release funds, they have to check for any black marks you might have. For instance, they will get your credit score report to confirm if you have borrowing problems or defaulted loans in the past. So, consider requesting a copy of your credit score before applying for the house loan to see what the lender will see. Do not fret if you have a bad rating, as there are various solutions you can consider to increase your credit score.
Fix Any Mistakes
When you go through your credit score, you might be attempted to assume everything is perfect. This is because you likely don’t know the key things lenders look out for to determine if you qualify for a loan. So, check keenly to determine if there are errors that can affect your credit negatively. Some vital things to watch out for include:
- Outdated information
- Debts you have already paid for or discharged
- Information that got to your report because of identity theft
- Data from your ex-spouse that needs to be removed
- Incorrect explanations for things that happened in the past regarding your finances
Experts recommend checking your credit report a few months before you start shopping for a mortgage. This will allow you to fix any minor blunders that could reflect on your credit report. Be sure to call your credit agency right away once you find such errors. You may also seek help from credit monitoring service providers; they look out for similar malicious activities that could affect your credit score.
Improve Your Credit Score
Generally, you are likely to have a better mortgage rate if you have a high credit score. So, if it’s too low, you will have to find a way to increase it significantly. The first step is to review your credit report and fix any errors that lower the score. Once that is done, you can consider options like:
- Registering on the electoral roll (those who aren’t registered find it harder to get credit)
- Paying your bills on time
- Making sure you do not indulge in fraudulent activities
- Keeping the credit card as well as revolving credit balances low
- Ensuring you don’t receive county court judgments for debts you haven’t paid
- Paying off any existing debts
- Not moving homes frequently as this could be a sign for lenders to assume you are dodging debt payment
- Keeping your credit use as low as possible
If you find it challenging to improve your score, be sure to seek help from a professional as they can find a customized solution for your problem.
Lower Your Debt-to-Income Ratio
Your debt-to-income ratio is the total amount of debt that’s attached to your overall income. This ratio is attained when the total monthly debt is divided by the monthly income. Before lenders give the mortgage for your home, they will check this debt/income ratio to determine if you can handle repaying an additional amount every month and the house you can afford. The lower the ratio, the higher the chance of getting approval.
When you repay most of your recurring monthly debts before applying for the mortgage, your debt-to-income ratio will be low. This will show the lender you have a good balance between the income and debts, so you won’t have problems repaying the loan. Increasing your monthly income by getting a second job, advancing your work skills to get a promotion or higher paying job, or working extra hours will help too. Your spouse can also help by repaying some debts on your behalf.
Go Large with Your Down Payment
Another aspect that will increase your chances of getting mortgage approval is a large down payment. Once you put down a large deposit, the lender will have more confidence in you since you know how to save. Such a down payment also increases the maximum affordability, attracts lower interests, and saves you from paying mortgage default insurance. So create a saving plan way ahead of time to save more money for the down payment.
Getting mortgage approval may feel overwhelming at first, but you can overcome all the obstacles if you are well prepared. Consider keeping these outlined tips in mind and consult a mortgage broker when the need arises.
Reverse Mortgage Alternative.
If you have experienced difficulties obtaining a traditional mortgage due to a low credit score, a reverse mortgage, specifically the Home Equity Conversion Mortgage (HECM) program, could be an attractive alternative. Unlike conventional mortgages, the HECM program does not have a minimum credit score requirement, making it accessible to a wider range of borrowers.
The HECM program focuses more on your ability to pay for the ongoing costs of the home, such as taxes, insurance, and maintenance, rather than your credit history. This is because the loan amount is primarily based on the borrower's age, current interest rates, and the lesser of the appraised value of the home, the sale price, or the maximum lending limit. Since no monthly principal or interest payments are required with a HECM, a low credit score that might disqualify you from traditional mortgages does not carry the same weight.
Of course, while a low credit score may not prevent you from obtaining a reverse mortgage, you should still be aware of the financial implications. Reverse mortgages can have higher upfront costs, and the accruing interest could potentially deplete your home's equity over time. However, if you’re over the age of 62 and looking for ways to supplement your income without the need for monthly loan repayments, the HECM program could be a viable solution. Always make sure to discuss your options with a financial advisor or a trusted mortgage professional before deciding.