Getting your first home is a massive step in your adult life. Finally, you will have a place to call your own and, one day, own outright.
But, to reach that dream of homeownership, you first have to qualify for a mortgage. For first-time home buyers, this process of qualifying for a mortgage can be a tricky and confusing task as banks are not always very clear on their requirements. So, in this article, we will be helping you develop a plan to get you through the mortgage process and approved to purchase your first home.
Things to Consider
When determining whether or not to approve a mortgage application, banks look at your whole financial picture to determine your overall financial health. So, you will need to develop a plan to get your financial picture in good standing before beginning the mortgage process. Here are the three main things that you need to make sure are in good financial health standing:
Lower Your DTI
DTI stands for debt-to-income and is one of the main ratios banks use to determine your creditworthiness. In short, DTI measures your average monthly debt payments versus your average monthly income.
For example, if you make $1,000 per month in gross income and your monthly debt payments are $400 per month, your debt-to-income ratio is .40 or 40%.
While, in most cases, you should have at least a few open credit lines, a lower DTI is traditionally viewed more favorably. So, make sure to pay off as much debt as you can to lower your overall monthly payments and lower your DTI before applying for a mortgage.
Increase Your Credit Score
The following financial measure that banks look at is your credit score. As you most likely know, your credit score, which is calculated, maintained, and distributed by independent companies, is a number between 300-850 used to determine your creditworthiness. A higher credit score means that you are more creditworthy.
Our best tips to improve your credit score are:
1. Review your Credit Reports on Sites such as Credit Karma (https://www.creditkarma.com/)
You have to know your current situation before you can improve it.
2. Make Sure All of Your Accounts are Current
Late payments and overdue accounts will significantly decrease your credit score. Make sure all of your accounts are current and up to date.
3. Decrease Your Credit Utilization
If you have any revolving lines of debt (for example, Credit Cards), make sure you use them as little as possible. Most resources recommend using 30% or less of your available credit limit.
4. Limit Your Hard Credit Checks
Every time a potential lender performs a hard check of your credit score, it slightly lowers your credit score. These credit checks usually do not affect your overall credit score much, but a lot of credit pulls in a short amount of time is a red flag to lenders.
5. Get Your Down Payment Together
Our last tip to help you prepare for the mortgage process is to get your downpayment together. The higher downpayment you have saved up, the better your mortgage application will look. Also, having a larger downpayment can increase your budget, widening your range of available homes within your price range.
Rework your budget, pick up some extra shifts at work, try a new side hustle, or whatever you need to do to make and save some extra cash.
The mortgage process can be daunting for first-time homebuyers, but you will be ready to take it on and purchase your first home if you follow these tips. If you have any questions or would like more one-on-one help, schedule a session with one of our certified financial coaches.