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As we emerge from the COVID-19 pandemic and navigate inflation, the idea of buying a house may seem daunting.
With the difficult state of the current housing market, every buyer needs to bring their A-game to find the perfect home. This may sound intimidating, but no worries! There are ways to ready yourself for the mortgage process.
Here are a few steps to help get you in financial shape before applying for a mortgage:
1. Save as much as you can for your down payment
The bigger the down payment you have, the higher your chances are of approval for a mortgage loan. Larger down payments lead to smaller loan amounts, which means smaller monthly payments and less money that a bank can lose if your house gets foreclosed on.
For many loans, the minimum down payment you need is 3.5%, but you may want to offer more if you can. According to the National Association of Realtors, the typical down payment for first-time home buyers ranges between 6% and 7%. For repeat buyers, the average down payment is a bit higher at 17 percent. However, individuals with bad credit may need to plan
on saving a bit more to get approved for a mortgage.
The best solution is to save as much as possible. Cutting back spending on unnecessary purchases is one way to bulk up your savings. Selling stocks and bonds or using funds from a pension or 401(k) can also help. Don’t be discouraged if you need to use multiple sources to scrounge up the money! This is common practice with the rising costs of housing.
2. Pay down your debts, if possible
Your debt-to-income ratio (DTI) plays a big role in whether you’ll get approved for a mortgage. By assessing your DTI ratio, lenders get an idea of what percentage of your gross monthly income goes toward bills every month, such as rent, student loans, or credit cards. This gives them an idea of how consistent you are with making payments to repay the money you
If you have a large amount of debt compared to how much you earn, you’ll have a higher DTI ratio. And the higher your DTI ratio is, the more risk you pose to lenders. To lower your DTI ratio and increase your chances of loan approval, pay down as much of your debt as you reasonably can (or increase your income!).
3. Do what you can to keep your credit healthy
In 2022, the minimum credit score to buy a house is between 580 and 620, depending on the type of mortgage you take out. There are several factors that are used to calculate your credit score.
For your FICO® score, these factors are:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit applications (10%)
When a person applies for a mortgage, a better credit score usually leads to better terms. That means investing in healthier credit can save you a lot of money in the long run because you’ll owe less interest. Paying your bills on time, keeping your credit card balances low, and refraining from opening any unnecessary credit lines are all methods to maintain a good credit
How Lexington Law can help you show your credit some love
As an industry-leading credit repair firm, Lexington Law helps clients repair any negative or inaccurate negative items, such as collection accounts or late payments, that are wrongfully affecting their credit. Their team will take the time to review your case, send out disputes on your behalf, and continue to monitor your credit.
Lexington Law provides financial tips for individuals looking to work on their credit. Paying down debt and ensuring your payments are on time are essential steps to getting your credit where you want it to be.
If you’re worried about your credit, Lexington Law is there to help. Try using their free credit assessment tool or speaking to a representative to see if their services are a match for you. Don’t be deterred from applying for a mortgage! Get help from Lexington Law and turn your dream home into a reality.
Update: Lexington Law is offering our readers a free credit repair consultation, which includes your FREE credit report summary and score. You can follow this link, or call 1-833-336-3339 to take advantage of this no-obligation offer.
Call anytime between 7am and 11:59pm EST to get your free credit report and score!