5 Steps to Scoring a Mortgage

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5 Steps to Scoring a Mortgage

There are several things that might prevent you from getting a mortgage. The major ones include having a poor credit score, not making enough money to qualify for the loan you desire, not having enough money for a down payment, and having too much debt. But you have power over all of these things. Let’s examine your alternatives for dealing with any obligations you could have as a borrower.

Key Takeaways

  • Paying off consumer debts, switching to a debit card instead of a credit card, paying your bills on time, and addressing any inaccuracies on your credit report may all help you raise your credit score.
  • Try getting a new job in your current field of employment if your income is insufficient to qualify for a loan so that you can demonstrate to lenders a history of stable employment.
  • To have the highest down payment and the lowest LTV, save correctly for your down payment.
  • Pay no more than the value determined by the bank.
  • Pay off your credit card balances, vehicle loans, and other debts to reduce your overall debt.

1. Repair Your Credit and Increase Your Score

Your credit score indicates to lenders how likely it is that you will make monthly mortgage payments that are both complete and on time. As a result, for the majority of loans, your interest rate will be greater the lower your credit score is to make up for the higher risk of giving you money. You will be categorized as subprime and have trouble acquiring a loan of any kind, much less one with favorable conditions, if your credit score is under 620. However, if your credit score is more than 800, you will be able to easily get the lowest interest rate possible (also known as the par rate).

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Paying off revolving consumer debts like credit cards or auto loans, using your debit card instead of your credit card for future purchases, paying your bills on time each month, and addressing any errors on your credit report are all actions you can take to raise your credit score relatively quickly. However, certain imperfections, such as very tardy payments, collections, charge-offs, bankruptcy, and foreclosure, won’t go away right away.

Avoid opening any new credit accounts and appropriately manage the credit you already have. Your credit score will momentarily drop if you apply for new credit, and having too much accessible credit is also a red flag. Lenders can be concerned that if you have a lot of credit accessible, you’ll use it one day and negatively impact your capacity to make mortgage payments.

2. Get a Higher-Paying Job

Ask lenders how much more you need to make if they claim your income isn’t high enough to qualify for the desired loan amount. Then look for a new position in your current field of employment where you can make that much money.

You must continue in the same field of employment for this technique to be effective since lenders like to see a continuous career history. For borrowers, this may be discouraging news since the greatest opportunity for a pay raise may be to completely change careers. However, changing employers may also be a smart move if you want to significantly increase your salary. Significant increases from current employers are uncommon, but a prospective employer is aware that he will need to make a unique offer to get you to move.

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Consider steps you may do fast to increase your value to employers if moving jobs right away won’t be enough to earn you the raise you need. Do you have access to any continuing education courses? Could a legal secretary transition to paralegal work? Could you go from being a receptionist to a secretary? You may be able to get advice tailored to your circumstances from a career counselor or headhunter on how to increase your marketability and how to meet your financial objectives.

Unfortunately, adding a part-time job to your full-time career may not provide you the qualifying income that lenders want. Since you’ll likely need at least 15 years to pay off your mortgage and the part-time work might be considered transient, lenders prefer it if you have stable long-term income.

3. Save Like Crazy

The amount of financing you’ll need will depend on how much money you put down. Lenders will also see you as less hazardous if your loan-to-value ratio (LTV ratio) is lower. You will be more likely to get approved for a loan if you have both of these qualities. Be aware that a greater down payment could not help you qualify for a loan until you reach a specific down payment criteria, such as 10% or 20% (with 20% being the most typical).

4. Don’t Pay More Than the Bank’s Appraised Value

The bank won’t want to lend more money than the home is worth because if you go into foreclosure and owing more than the bank could sell it for, they may wind up losing money. A 20% down payment also loses a lot of its value if the house’s value is 20% below the asking price. When making an offer to buy a house, one should keep in mind that collateral value is significant to lenders.

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5. Reduce Your Debt

A lender defines excessive debt as a total monthly debt payment that is too large for you to repay the monthly mortgage payment you are requesting, not as a specific dollar amount.

Lenders consider both the front-end ratio, or the portion of your gross monthly income that will be consumed by your mortgage payment (principal, interest, property tax, and homeowners insurance), and the back-end ratio, or the portion of your gross monthly income that will be consumed by the mortgage payment plus your other monthly obligations, such as student loan, credit card, and car payments.

Lenders will determine that you can afford a smaller monthly housing payment and a lower purchase price if you are compelled to pay off more debt each month, whether it is “good debt” like a school loan or “bad debt” like a high-interest credit card. One of the quickest and most efficient strategies to raise the amount of loan you qualify for is to reduce your debt.

The Bottom Line

Mortgage eligibility isn’t always straightforward. All applicants must pass certain financial requirements and norms, and lenders only provide a small amount of latitude within these restrictions. You’ll need to learn how to play the game if you want to get a mortgage, and if you follow these instructions, you should do well.

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