5 Things to Consider Before Applying for a Mortgage

Even in this day and age, an important part of the American Dream involves owning your own home. In fact, for many citizens of the country, home ownership is synonymous with economic certainty. But in order to achieve this significant milestone, individuals have to first apply and get approved for a mortgage.

Most people think that qualifying for a home loan is not easy; however in reality, plenty of applicants are approved for mortgages every single day. As long as you have your act cleaned up, there's no reason why you won't get the financing that you need. If you're planning to apply for a home loan in the near future, keep in mind the following factors, as they are likely to most heavily influence your chances.

1. Credit Score: Lenders prefer applicants with high credit scores, as this indicates that the borrowers know how to manage credit and are less likely to miss payments. A high credit score is anything that's above 700, and the closer you are to 850, the better it is for you. Before you apply for a mortgage, go through a copy of your credit report. Try to remove errors, if any, and fix issues that are dragging your score down. (To learn more about the connection between credit score and mortgage rates, click here.)

2. Outstanding Credit: In order to qualify for a home loan, it's important that you reduce your outstanding bills and carry very low balances. Pay off as many debts as you can within reason – this includes credit cards, auto loans, student loans, etc. You shouldn't drain your savings, as you'll create another risk, as we discuss below. The lesser the amount of debt, the quicker is the underwriting process, as it signifies lower risk of mortgage payment problems in the future. Additionally, ensure that you don't open or close any credit cards, else the lender may get suspicious.

3. Income and Stability: Lenders like to see that you have a stable income and a sizable amount of money in the bank, as these will enable you to pay your mortgage bills easily. This is why you should reduce your debt, within reason. If you exhaust your reserves to pay off your debt, the lender will see you as being riskier, as you lack a financial cushion. If you have a job, try not to change it before applying for a home loan. Calculate your debt-to-income ratio to determine your ideal monthly payment – this is essential because you're not likely to get approved for a loan that you cannot afford. Ideally you would aim for a house that's clearly within your means, since it will greatly increase your chances of approved.

4. Lender: Every lender is different, and it is paramount to approach one who has a good balance between approval rate and interest rate. A hard money lender may approve everyone, but their rates are high; whereas a local Credit Union may approve fewer, but have significantly lower rates. Conduct due diligence - learn about the history and reputation of the lender, and if something seems amiss, consider approaching a different one.

5. Down Payment and Closing Costs: Last and not the least, the larger the amount of down payment you're ready to shell out, the greater your chances of approval, especially if you're someone who has less-than-perfect credit. The minimum amount that you'll be asked to put up as a down payment may vary from 3.5% to 5%, while another 2% to 5% could be needed for closing costs. Some lenders will force you to take Private Mortgage Insurance (PMI) if you don't meet their minimum down payment threshold. PMI costs between .5% to 1% per year, based on your balance.

Most people save up for many years in order to satisfy the down payment condition. However there are some who prefer taking a loan to meet this requirement. The latter route makes sense only if money can be raised at low interest rates, else it would result in too much pressure on the borrower. At Fund&Grow, we help our clients obtain as much as $250,000 of unsecured credit at 0% interest that they can safely use to meet the down payment requirement on their mortgage, or for business financing purposes. We do charge a flat fee for our services, but in return we guide you every single step of the way. To learn more about how we can help you get the credit you need, call us at (800) 996-0270.