Getting approved for a mortgage is more difficult than most people think. Many people are surprised to learn that they aren’t eligible for the loan amount they’re looking for. In some cases, people struggle to get approved for a loan at all.
This can lead to major disappointment, especially if you’ve already been house shopping or are desperate to get out of your current living situation. However, there are a few things you can do to prepare for your mortgage application. Mostly, it comes down to knowing your finances.
Let’s talk about five ways you can set yourself up for financial success. Keep reading for the top five factors to consider before applying for a mortgage.
1. Your Monthly Cash Flow
First, you need to understand your debt-to-income ratio. This is your basic monthly cash flow. Your debt-to-income ratio is how much money you bring in each month versus how much you owe in terms of loans, credit cards, and other debts.
This number is used to determine how big of a mortgage you can responsibly take on (in the eyes of the lender). However, it’s also important for you to consider how much you can comfortably afford to pay to make sure you’re not setting yourself up for financial hardship.
2. Your Credit Score
The success of your mortgage application largely comes down to your credit score. Part of your credit score is dictated by your debt-to-income ratio, as listed above. However, there are several other factors that affect your credit score and loan eligibility, such as:
- Bill payment history
- Maxed out credit cards
- Limited credit history
- Accounts sent to debt collection services
- Multiple loan inquiries (hard pulls)
- Rental history
- And more
This credit history will determine many aspects of your loan, such as your mortgage interest rate, total loan amount, and other terms and conditions. Many lenders use mortgage application software that analyzes your eligibility based on these numbers and algorithms.
3. Your Down Payment
Next, start thinking about how much money you want to put down on your mortgage. Financial experts recommend a down payment of 20% of the home’s value, which can feel like a daunting number.
However, most home loans only require 3.5% to 5% down. There are also VA loans that allow you to apply for a mortgage and put zero money down.
4. Type of Loan
As noted above, the type of loan you’re applying for will dictate how much of a down payment you need. There are many pros and cons to different types of loans.
There are fixed-rate and variable-rate loans. Fixed-rate loans have a locked-in interest rate for the entirety of its life. Variable-rate loans start with a loan rate but fluctuate with the market (up or down).
There are also FHA loans, which are ideal for a mortgage application with a limited down payment. Lastly, VA loans are available to past and present military personnel.
5. Your Work History
Finally, lenders take your work history into account while processing your mortgage application. A bank needs to know they’re lending money to someone who can hold a steady job and pay them back.
They typically need to see at least six months’ worth of pay stubs to verify your income and job security. Getting a new job in the middle of an application process can restart the entire process.
Are You Ready to Submit Your Mortgage Application?
If you’re ready to buy a new home for you and your family, you must start with a mortgage application. Are you ready for the process? Have you taken the five factors listed above into account?
As long as you’ve done your homework and you know what to expect, your mortgage application approval should be a breeze. But if you’re looking for more advice on business, finance, or homeownership, be sure to check out some of our other Real Estate, Property Management, and Home Improvement articles before you go. Our blog was created to help people like you get ahead in life and finance!