Buying a home can be a nervous experience for many potential homeowners as they’re constantly worrying about whether or not they’ll be approved for a mortgage. It’s not always easy to qualify for a mortgage, but there are a few tips you can follow to help reverse that. Of course, without a mortgage you’d have to lay down a suitcase full of cash to buy your home. And let’s face it, the average North American isn’t usually in the position to do that. These are some tips that may help you qualify for a mortgage.
Try to improve your credit rating
It generally helps to get approved for a mortgage if you have a good credit score or rating. You can always find out what your rating is by ordering your credit report from websites such as annualcreditreport.com. If you believe your rating is too low or there’s a mistake in the report it’s a good idea to get the issue straightened out as soon as possible. Once you’re satisfied there are no mistakes you should attempt to reduce your utilization ratio. This is the percentage of credit that’s available to you which has been used at any given time. For example, if your available credit is $10,000 and you’ve used $2,000 of it, the percentage will be 20 per cent. As a rule of thumb, you should try to keep it to 30 per cent or lower.
Limit your credit cards
If you already have credit cards, try not to sign up for any more of them. Some people are under the impression that more credit cards will lower your credit utilization percentage. However, your credit score will be dragged down if you apply for a credit card just before applying for a mortgage or during the mortgage-application process. And even though your score might drop by just a few points it could mean make the difference in being rejected or approved for a mortgage. There is an exception to this rule though. If you don’t own a credit card it’s recommended that you apply for one with the highest limit possible at least six months before applying for a mortgage. This will help your credit-utilization ratio.
A bigger down payment
The more money you put towards a down payment the better your chances will be of obtaining a mortgage. Since your down payment is bigger it means you don’t have to borrow as much money to pay off the home. It’s a good idea to save as much as possible for a down payment. This is because most moneylenders prefer to work with somebody who lays down more cash even if their credit score isn’t the greatest. For instance, if your credit score is a little low, but you have a 15 per cent down payment it’s usually treated the same as having an excellent credit score with just a five per cent down payment.
Lower your debt
In general, the cost of homes is rising at a faster rate than incomes. Therefore it’s a smart idea to keep a lower debt-to-income ratio when possible. Monthly mortgage payments rise when interest rates and housing prices increase. You should try to keep your total housing costs to 28 per cent or lower of your gross monthly income. These housing costs also include homeowners’ insurance and taxes. When you combine the costs with your other monthly debts such as student loans, auto loans, and credit card payments you don’t want to go above 36 per cent of your income. According to studies, most successful mortgage applicants keep their housing costs to 24 per cent or lower.
Don’t rush yourself
Take your time and plan things out before applying for a mortgage. It takes quite a bit of time to improve a credit rating and to save up for a bigger down payment. You should try to give yourself at least six months to take care of your credit score and down payment even though some credit-score mistakes can be rectified in about a month. If your error isn’t cleared up within a few weeks it could be several months before it’s fixed.