Thinking of Buying A Home? Here’s What You Can Do Now To Prepare For Getting A Mortgage
This may sound counterintuitive, but many experts advise first-time homebuyers to find a mortgage before they even start searching for a house. Assuming that home loan financing is an absolute certainty is one of the biggest mistakes buyers make.
So, It’s time to stop window shopping on Zillow. If you don’t want to face any setbacks, there are a few key things you can do to better prepare for a mortgage before you take the plunge. It is recommended that you do this before you even speak to a real estate agent or mortgage broker to stay as objective as possible.
1. Check Your Credit Scores & Reports
While this may sound cliché, you need to have a firm understanding of where you stand before you can plan your next course of action.
Mortgage lending revolves around credit scores, and whether you are qualified for a mortgage or not, and the rates you get depends entirely on your creditworthiness, which is ascertained based on your credit score.
There are numerous sites and services such as Credit Karma or Credit Sesame that allow you to check your scores for free.
If you have a low score, instead of wasting time searching for a mortgage, or worse, accepting significantly higher interest rates, you can just focus on repairing your credit.
2. Improve Your Credit Scores
Your credit scores are not written in stone, so if they are in the ‘Good’, ‘Fair’, or ‘Very Poor’ range, there are steps you can take to substantially overhaul your scores.
Credit scores are commonly calculated based on these factors with different weightage for each,
Payment history (35%) - Credit repayment history, on-time payments, delays, etc. A single EMI late payment can affect your scores, so make sure you have a history of prompt payments.
Credit Utilization (30%) - Your credit limit vs your credit usage ratio. Credit usage above 30% is indicative of credit hungry behavior, and is likely to result in lower scores.
Length of Credit History (15%) - Accounts that have been open for longer periods of time, including loans and credit cards are indicative of creditworthiness.
Number of Credit Accounts (10%) - Having a diverse loan portfolio of secured, and unsecured loans, monthly installments, and revolving credit will help increase your scores.
New Inquiries (10%) - Each time you apply for a loan, a new credit card, or refinancing, your lender will look-up your score, which can have a negative impact as it signals reckless borrowing.
These are the key factors that affect your credit score, and now that you know what they are, you can start modifying your behaviors accordingly to improve your score over time. There are even credit repair services that help individuals repair poor scores with a systemized process.
Remember, ‘not now’ does not mean ‘never’, and you might still qualify for home loans with a ‘Fair’ or ‘Poor’ score, but the unfavorable rates and terms will eat into your financial wellbeing for the next 20 to 30 mortgage paying years of your life.
3. Stay In A Rented House First
This might already be the case for most people, but if you are staying with your parents, and there is no shame in that! Make sure to move into a rented house first, before you decide to apply for a mortgage or look for a house to buy.
Staying in a rented house while making regular monthly payments shows consistent income and financial responsibility, which mortgage lenders favor, as such individuals are less likely to default on payments.
Living independently in a rented house also helps prepare first-time homeowners to become more knowledgeable in maintaining and managing a house.
4. Identify Red Flags
Even with a perfect application and credit score, you may fail to qualify for a mortgage if underwriters find any red flags in your financial history.
This may include large undocumented deposits into your checking account with no explanation as to where it came from. Before you hand in the key to your files, it is recommended that you have an explanation for such issues.
Other red flags may include lifestyle changes, such as divorce, job changes, or anything else that may have a material impact on your financial wellbeing.
Final Verdict
Buying a house is a significant milestone in every young adult’s life, and when done right, it can be a significant asset to anchor and provide stability throughout your life.
For most people, the equity they build with their first house is the precursor for a peaceful retirement, and it often starts with the mortgage.
