We all have dreams of settling down in the perfect home. Unfortunately, if you're not careful, you might find your dream of buying that ideal home hindered by obstacles with your local lenders.
If you want to make sure that you'll be able to borrow as much money as you need, take some time to improve your buying power before you start exploring the market. Boosting your buying power means improving your credit, considering the state of the market, and adjusting your saving habits to convince lenders that you're trustworthy.
While there are plenty of things you can do to transform yourself into a more attractive borrower, we're going to look at some of the most important ways that you can prepare yourself to finance a new home.
1. Start by Finding a Guiding Hand
If you're a first-time homebuyer, you might need a little guidance to help you get through the lending process successfully. Even if you’ve purchased a home before, the rules and processes may have changed since the last time you applied for a mortgage. In either case, it’s best to seek the advice and insight of a professional. Working with a mortgage broker is a good way to ensure that nothing catches you off guard when you start filling out loan applications.
If you’re applying for a reverse mortgage in order to help finance the purchase of a new home, you should get assistance from a Certified Reverse Mortgage Professional (CRMP) who can guide you through the process. Additionally, CRMPs are well versed in the intricacies of dealing with buyers, sellers, and agents, with regards to the reverse mortgage for purchase. They can help you and your realtor ensure a smooth transition. There are stipulations surrounding who is eligible for this type of loan and how the loan is structured, so a professional can assess your specific situation and determine whether a reverse mortgage is the right strategy for you.
Mortgage brokers can help to give you a better idea of what you can reasonably afford based on your income and the current real estate market. By speaking to an expert, you might find that you have more opportunities than you originally thought.
2. Clean Up Your Credit Score
There are a few things that can affect how much interest a lender decides to charge on your mortgage. They'll consider the amount of money you're borrowing, and how long your mortgage term will be; but the factor that you have the most control over is your credit score.
Lenders review your credit report to determine whether you seem reliable enough for a loan, and what kind of interest rate to offer you. They essentially use your credit score to evaluate your risk as a borrower, and determine how likely you are to make timely payments on your loan. The higher your credit score is, the better your mortgage rate will be, because you will be judged as a reliable and low-risk borrower.
Many finance professionals advise not to check your credit score too often — however, if you notice a dip, make sure you investigate what caused your score to drop and work on raising the number as soon as possible. Pay off your debts and fix any credit report mistakes in a timely fashion in order to maintain a good credit score.
3. Reduce Your Debt-to-Income Ratio
Your debt-to-income ratio is essentially an insight into the amount of debt you have compared to your incoming cash. Lenders calculate this number by dividing your monthly debt payments by your monthly income. The result is expressed as a percentage, and your lender will address this percentage when determining how well you'll be able to manage payments.
If you have a low debt-to-income ratio, this will indicate that you have a good balance between your debt and income (you owe very little in debts compared to the cash you have coming in). In most circumstances, 43% will be the highest debt-to-income ratio you can have while still qualifying for a mortgage. If your ratio is higher than this, you may need to work on paying down debts before you buy a house, or risk having to pay a higher interest rate. The good news is that many lenders allow debt-to-income ratios to be lowered based on the cash you may receive during your refinance; provided you use those funds to pay off some outstanding debt.
4. Ramp Up Your Down Payment
Nothing shows your lender that you’re reliable more than a sizable down payment. A large deposit not only outlines your ability to save but also reduces your overall loan-to-value ratio, which improves the chance that you'll be able to get the mortgage you want. Your loan-to-value ratio is calculated when you divide the price of the mortgage by the purchase price for the property.
The bigger your down payment, the lower your loan-to-value ratio — which can result in better terms on your mortgage, smaller monthly payments and that less interest over the life of your loan.
5. Know the Facts on Mortgage Rates
Although your credit score, debt-to-income ratio, and down payment can all impact how likely it is that you'll be able to purchase your ideal home, there's one important element that many would-be homeowners overlook. The current mortgage interest rate can frequently determine how much cash a lender is willing to let their clients borrow.
If you wait around too long, and the mortgage rates creep up by a percentage point or two, you could find that you can no longer afford the same home you would have been able to buy only a year ago. That's why experts often recommend that you lock in a good fixed interest rate when you can.
For more information about qualifying for a refinance or purchase loan, or to get assistance from one of our Certified Reverse Mortgage Professionals, contact ARAMCO.