Putting yourself in the best financial position possible will pay off when applying for a mortgage. Before you look for your dream home, you’ll need to have a strategy in place. Your mortgage broker can help put your financial ducks in a row, thus allowing you to get the best possible deal on a new home. Follow these tips to take some of the sting out of the mortgage process.
Strengthen Your Credit Score
A strong credit score can be the best tool for obtaining a better mortgage rate and lower monthly payments. Generally, scores between 700-740 are good, while a score greater than 750 will get you the best deal. A score below 680 may put you in a category that requires you to pay a higher rate or supply a larger down payment. If you are unhappy with your credit score, meet with your mortgage broker to develop a plan for improvement.
Credit scores are a bit of an enigma for most. The formulas for calculating scores aren’t public knowledge, but you don’t need to know the exact formula to understand what can help or hurt your score. In general, scores take into account:
- Payment History (no late payments)
- Debt (lower ratios are better)
- How long the accounts have been open (the longer, the better)
- How many new accounts you have and new credit inquiries
- The variety of credit accounts you have
New accounts and inquiries can negatively affect your credit score, but not necessarily. Your score is calculated differently based on whether one type of lender pulls your credit versus several different kinds of lenders make a request. In other words, if several mortgage companies request your credit over a 2 week period, it is assumed you are shopping for a mortgage loan and your score shouldn’t have much (if any) impact. If mortgage companies, credit card companies, and apartment complexes pull your credit, then it might lower your credit score.
You are entitled to a free credit report every 12 months from each credit reporting agency (Equifax, Experian, and TransUnion). You should exercise this right annually, and know that if you request your own credit it will not impact your credit score.
What Can You Comfortably Afford?
While you may aspire to the huge home on an acre lot with a swimming pool, is it realistically in your budget? We’ve got several mortgage calculators on our website which can help you determine your monthly payment, interest rate and home price. However, the real question is what amount will impact your standard of living? One way to play with the numbers is to figure out what your monthly payment is on a house you think you can afford. Our calculators don’t account for homeowner’s insurance or local taxes, so be sure you add those to your monthly payment (see What’s In A Mortgage Payment). Once you determine your monthly payment amount, put the difference between your current rental/mortgage payment and the new payment into a savings account each month. You should also add another 25% of the newly calculated payment to your savings to account for monthly maintenance. Live this way for a few months and see how this affects your current standard of living.
Save for Down Payment and Closing Costs
You’ll need to put down anywhere from 3.5% to 20% of the sales price of your new home. In addition, you’ll probably pay some closing costs. Closing costs may include lender fees, appraisal fees, credit report, and title and flood certifications. For more information about saving for a down payment, see our blog post about saving strategies for down payments.
Build a Healthy Savings Account
Your lender wants to see that you aren’t living paycheck to paycheck. Therefore, you’ll need to have some investments and savings. Preferably, mortgage loan applicants should have 3-5 months worth of mortgage payments in liquid investments/savings. Many of us encounter financial hardships from time to time, and your lender is more likely to release funds to you if they feel you can weather a financial storm.
Meet with your Mortgage Broker
Your mortgage broker can review your financial position and help you choose the best plan of action. If you haven’t quite reached your financial fitness goal, a good broker can help to determine how to get back on track. It costs nothing to meet with a broker, and because they have relationships with several lenders, they can offer several different loan scenarios. At MAK Financial, we’ll provide independent, objective advice and help you create the best mortgage strategy.