You know you’re doing big things when you receive your first mortgage bill. It may not be as sexy as a new car or as ego boosting like getting a promotion.
Okay, so to have that feeling you need first have a mortgage. For many, just the word mortgage creates sweaty armpits and a migraine. But calm down!
Millennials actually make up the largest percentage of homebuyers at 33 percent. So that means you can do it and you are not alone. Apply for home loan isn’t as difficult as you think. Now getting approved is another story all on its own.
Here are a few tips on preparing to apply for a mortgage.
1. SAVE UP FOR A DOWN PAYMENT.
People always say, you should have 20% to put down on your home. But there are many loan programs for home buyers that will give you the chance to put as low as 3% down. Contact a lender or a realtor to find out what programs are available to you.
2. DEBT-TO-INCOME RATIO.
This is the percentage of your monthly income that goes to paying debts. It’s one of the chief things lenders look at to determine whether they’re going to give you a loan or not.
Think of it like this, if you earn $4,000 a month, but you pay $700 a month in recurring debts: $300 for your 2000 Civic, $300 for a student loan, and $100 on a Visa. $300 + $300 + $100 = $700 divided by $4,000 equals 17.5 percent. That’s a percentage most lenders will be happy about.
Now, let’s think mortgage. If you are looking to add is $1000 in mortgage payments. $300 + $300 + $100 + $1000 = $1,700 divided by $4,000 equals 42.5 percent. Seems like a big percentage, but lenders typically approve 43 percent DTI ratios and lower. 43 percent is the magic number.
Create and calculate your debt to income ratio for a few months. If you find it to be above 43% a lender may still give you a loan. On the flip side, you should get your debt as low as you can before you start your loan application process.
3. STUDENT LOAN FACTOR.
The amount owed on student loans has tripled in the past 10 years to nearly $1.1 trillion, according to the Federal Reserve Bank of New York. If you have high student loan debt, lenders will include the total loan as part of your debt to income ratio. This will inflate your debt to income ratio to the point a lender may not even call you back. (Sorry for the wrongly timed joke)
The only option you have is to aggressively pay down the debt.
4. DO YOU HAVE GOOD CREDIT?
Live within your means people. By not carrying any credit card debt, you will not only be able to afford and get a mortgage, but it will also help keep the interest rate on the mortgage low. So if you are charging drinks at FW Sullivans and tacos at Southern Tacos you are doing it wrong (Our RVA Peeps get this)
5. JOB STABILITY AND HISTORY QUALIFICATION.
Lenders rely on a stable employment history and a couple of years of steady or increasing income to determine what kind of loan you’re capable of paying back. So if you’re thinking about taking a new job, postpone the switch until after you’ve qualified for a mortgage. Now with that said a promotion or job upgrade in the same field may be okay.
6. PROS AND CONS OF A CO-SIGNER.
If you have weak credit, a high debt-to-income ratio or an unstable work history, you may have to lean on your parents. I’m not lucky enough to ever have had this conversation, so I can’t tell you what to say. But you can use them as co-signers.
Using a co-signer would allow you to buy a home that would have otherwise been impossible. You would get the title to the deed, and since you pay the mortgage payments, you are the one strengthening your credit.
Downsides? Going this route puts pressure on your co-signer. If they co-sign for you they will also be increasing their debt to income ration and that may hurt them in the long run if they need to borrow. So think of them needing a new car or a having to get a loan to buy a new roof for their home. Al of this will become more difficult for them.
7. LOOK FOR PROGRAMS, GRANTS & SPECIAL MORTGAGES
There is more than one way to skin a cat (not that you would ever do that). Look for grants that will help with a down payment. Some programs may cover up to 3% and that will cover nearly the entire minimum down payment requirements for many mortgage programs. Also you can select a mortgage that has no down payment requirement such as a USDA.