Not everyone will have the funds to purchase a home in cash, which means you will need to take out a mortgage. Our Folsom mortgage lender team works with homebuyers every day to sort out the best mortgage package for their needs. It takes a lot of careful planning when applying for a mortgage and we have the three most important areas that you need to know about before you begin this process.
Your Credit Score
At the top of this list is your credit score, because it plays an important role when it comes to qualifying for a Folsom mortgage loan. While you don’t need a perfect credit score or history to qualify for a mortgage, you do need to have good credit. Lenders will look at this first to determine how much of a credit risk you are. They then use this to determine your interest rates and how much you are able to borrow. It goes without saying that, the higher your credit is, the better are your chances of both qualifying and getting a good interest rate.
If your credit score isn’t at its best, there are some steps that you can take to boost it. Start by cleaning your credit up. Get hold of your credit report and go through it to see if there are any errors that need to be fixed that are bringing your score down. It’s also important to pay down any high-interest rate credit cards and loans. This is something you should plan on doing months before you begin the process of applying for a mortgage.
What is considered a good credit score? In the United States, credit scores range from 300 to 850. 300 to 499 is considered very poor, 500 to 600 is poor, 601 to 660 is considered fair, 661 and 780 are considered a good score, and anything above 780 is considered to be an excellent score. Most people have a range between 661 and 780. Most lenders want you to have a credit score of at least 620 or more to qualify for a mortgage. Other programs, such as federal and FHA loans require a score of at least 500.
Your Down Payments
The amount you put down for a home also plays a big role in how much you will be paying back overall. Many advise that you put at least 20% of the home value down. However, not everyone has the cash to put down and the average home price can equate to $50,000 for a down payment.
Thankfully, this is only a guideline and you can buy a home putting down less. You do need to keep in mind that the less you put down, the more your monthly payments and interest will be. You may also be required to pay mortgage insurance, which can add a couple of hundred dollars a month to your repayments.
Your Debt-to-Income Ratio
The last important aspect when applying for a mortgage loan is your debt-to-income ratio. Lenders will take the amount of debt you have outstanding and compare this to your income. To come up with your DTI percentage, your amount of debt is divided by your income. Let’s say that you bring home $6,000 in income each month and you pay $500 out towards debt and bills. This would give you a debt-to-income ratio of 8.3%. Next, we add in the monthly mortgage repayments, for example, $1,000 a month. This will give you a debt-to-income ratio of 25%.
Lenders will want your debt-to-income ratio under 36%. If you tend to max out your credit every month and are only making the minimum payment, it’s a red flag to lenders that you may not be able to handle your debt, putting you at a higher credit risk. Getting your debt-to-income ratio down is something you will want to do before applying for a mortgage. You can do this by paying down your high-interest rate loans and credit cards, as mentioned earlier. Try to pay off as much debt as you can ahead of time to give you the best chances of getting approved for a mortgage.
If you need some advice or help with any of the above, you can give our Folsom mortgage lender team a call today to help get you started.