Owning a house is a dream that almost everyone has in common. Not having to worry about renting a place and having the freedom to modify your home the way you want are among the top things on the “to-do” list. While the dream is truly amazing, the financial aspects of owning a home may wear you down.
And now, when mortgages are increasingly difficult to obtain, it is all the more essential to be prudent with finances. While the task may seem daunting at first, applying for a mortgage isn’t that scary once you know what to expect and how to go about it.
Here are some key things you should check off when applying for a mortgage.
- Meet the eligibility criteria
Lenders will look for certain key things in your application before approving or denying it. So, to get approval, ensure you have a sound credit rating – typically, it should be above 620. Steady employment, high income, and a good down payment are also important deciding factors.
- Apply within your budget
It is best not to borrow an amount that will be difficult to pay off. Mortgage lenders will check your Debt-to-Interest ratio before processing the loan application. This means that you should not pay more than 28% of your total income on the mortgage. Also, your mortgage and other loans put together should not exceed 36% of your income.
- Decide on the loan type
First-time buyers have the option to apply for home loans backed by the FHA (Federal Housing Administration). Other options include Conventional mortgages, Fixed-rate loans, Adjustable-rate mortgages, and more. Regardless of the loan type, the interest rate will depend on the condition of the economy, current market trends, and your income and credit history.
- Save enough for a down payment
It is wise to save up as mortgage lenders will require you to make a down payment on the house. But the final amount you need to pay will depend on the type of loan and lender. For instance, conventional mortgages require you to pay around 5% to 20% of the loan amount. However, government loans like FHA and HECM reverse mortgages will need much lower down payments.
- Get your documents in order
Even before you apply for the mortgage, you must have all the necessary legal documents in hand. These documents include your pay stubs for at least two months, tax returns, bank statements dating back two months, and a written statement from your employer confirming you are their employee in good standing.
- Ensure foolproof closing
Once a lender approves the mortgage, they will give you a package containing closing costs (typically, 3 to 4% of the total home sale price) and other vital documents. Ensure to reach each one carefully as it will spell out the terms and conditions of your loan, repayment, and further details.
Why mortgages are increasingly difficult to obtain
One of the primary reasons it is challenging to get a mortgage these days is the pandemic’s impact on the economy. Banks and other money lenders are changing interest rates while hiking credit score requirements for home loans. Having said that, if you ensure a good credit rating, steady employment, and a substantial income, you should be able to attain a mortgage without much hassle.