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9 Tips for Securing Your First Mortgage

sss9 Tips for Securing Your First Mortgage

9 Tips for Securing Your First Mortgage

Buying a home is a significant milestone that requires multiple years of planning. It’s exciting to finally get the keys to your own home, and some first-time homeowners decide to invest in multiple properties. If you’ve explored homeownership, you’ve probably considered applying for a mortgage loan.

A mortgage helps first-time homeowners cover the difference between the down payment and the selling price. Even people with enough money to pay in cash usually get financing so they preserve strong cash positions. Knowing how these financial instruments work can help you at any stage of your real estate investing journey.

Some tips that can help you secure your first mortgage are:  boost your credit score, trim your debt, save for a down payment, get pre-approved, understand your loan options, opt for the longer 30-year mortgage term, choose fixed interest mortgage, plan for closing costs, and work with a realtor.

In this article, we’ll look at these tips in detail. If it’s your first time going through the mortgage process, these nine tips will help fast-track your home purchase.

1. Check your credit score

According to the National Association of Realtors’ annual survey, 78% of recent buyers financed their property purchases in 2022.

Mortgage lenders will look at your credit score and other details before giving you a loan, and most of them have minimum credit score requirements. You’ll need a 620 credit score or higher to qualify for conventional loans. Some lenders require a credit score as high as 680.

This does not mean people with lower credit scores cannot get a mortgage loan. You can get a Federal Housing Administration (FHA) loan with a 500 credit score if you put at least 10% down.

When considering mortgage financing, you should check your credit report to know your credit score. Knowing your credit score tips you off on which mortgage makes the most sense for you, but it can also provide inspiration. If your credit score is not up to par, you should raise it before going for mortgage financing.

Even if you already have the minimum credit score, you should raise it anyway. Gaining a few extra points on your credit score can reduce your interest rate and increase your maximum loan amount.

While building your credit score can feel complicated, most of it boils down to paying debt on time and keeping your credit accounts open to build history.

Want to get more tips on how to boost your credit? Follow discussions in real estate investing and personal finance threads like https://twitter.com/marcotonycampos.

 

2. Trim your debt

Paying off credit card balances improves credit scores. Importantly, paying off debts also strengthens your debt-to-income ratio (DTI). The DTI is a critical metric lenders use when assessing your application.

Every borrower has a debt-to-income ratio that indicates the percentage of their income that goes towards debt payments. If you make $5,000 per month and pay $4,000 per month in debt, you have an 80% debt-to-income ratio. Lenders will be afraid to tack on an extra $2,000 per month to your monthly payments if it would put your debt-to-income in a precarious state.

Lenders won’t consider your application if you have an 80% debt-to-income ratio. You should aim for a debt-to-income ratio below 36% to get the most financing opportunities and better rates.

Financial institutions may work with you if you have a 43% debt-to-income ratio, but an FHA loan may be your only option if you have a 55% DTI ratio. You can improve this ratio by increasing your income or lowering debt. It may be worth picking up a side hustle for a few months to report higher income and reduce debt’s impact on your finances.

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3. Set savings goals

A solid credit score and debt-to-income ratio put you in an optimal position, but you still need to raise funds for the down payment.

A 20% down payment is the gold standard since it lets you escape private mortgage insurance (PMI). But most people make lower down payments.

The same National Association of Realtors survey revealed that the average first-time buyer makes a 6% down payment. While this makes real estate feel easier to enter, you’ll have higher monthly mortgage payments and insurance premiums.

You can remove PMI from most mortgage loans from your loan once you achieve 20% equity in your home.

You should aspire to put down 20% of your home’s purchase price. A larger down payment means you’ll have relatively lower monthly mortgage payments. Set a budget for your home and identify the down payment amount that lets you hit the 20% threshold.

Many experts recommend allocating less than 28% of your monthly income to mortgage payments. A higher down payment will help you abide by that rule, remain financially robust, and provide better mortgage choices.

4. Get pre-approved

You’re not the only one looking to buy a home. Even in a buyer’s market, you can expect multiple buyers to look at the home you’d like to buy. The seller makes the final decision, and getting pre-approved can increase your chances of landing a deal.

The pre-approval process lets you know the maximum financing you can receive for a mortgage. So, the pre-approval letter helps you know your home purchasing power.

Sellers don’t want to deal with financing mishaps from the buyer. These roadblocks can slow down the sale and even cause it to fall apart. Preapproval removes those fears from a seller’s mind and makes them more confident to sell you the home.

While pre-approval provides reassurance, it’s not a guarantee. You still have to submit a mortgage application. Barring any substantial changes to your finances, your pre-approval is a solid indicator of what you can get from a lender. Most home buyers pursue this route when they feel confident about a home since pre-approval expires in 60-90 days, depending on the lender.

You’re not the only one looking to buy a home. Even in a buyer’s market, you can expect multiple buyers to look at the home you’d like to buy. The seller makes the final decision, and getting pre-approved can increase your chances of landing a deal.

The pre-approval process lets you know the maximum financing you can receive for a mortgage. So, the pre-approval letter helps you know your home purchasing power.

Sellers don’t want to deal with financing mishaps from the buyer. These roadblocks can slow down the sale and even cause it to fall apart. Preapproval removes those fears from a seller’s mind and makes them more confident to sell you the home.

While pre-approval provides reassurance, it’s not a guarantee. You still have to submit a mortgage application. Barring any substantial changes to your finances, your pre-approval is a solid indicator of what you can get from a lender. Most home buyers pursue this route when they feel confident about a home since pre-approval expires in 60-90 days, depending on the lender.

You’re not the only one looking to buy a home. Even in a buyer’s market, you can expect multiple buyers to look at the home you’d like to buy. The seller makes the final decision, and getting pre-approved can increase your chances of landing a deal.

The pre-approval process lets you know the maximum financing you can receive for a mortgage. So, the pre-approval letter helps you know your home purchasing power.

Sellers don’t want to deal with financing mishaps from the buyer. These roadblocks can slow down the sale and even cause it to fall apart. Preapproval removes those fears from a seller’s mind and makes them more confident to sell you the home.

While pre-approval provides reassurance, it’s not a guarantee. You still have to submit a mortgage application. Barring any substantial changes to your finances, your pre-approval is a solid indicator of what you can get from a lender. Most home buyers pursue this route when they feel confident about a home since pre-approval expires in 60-90 days, depending on the lender.

5. Assess your financial options and shop around

Home buyers can select several financing options and lenders. Conventional mortgage loans have the highest credit score requirements but have competitive rates and terms. You should also explore government-backed mortgages, such as FHA loans for first-time home buyers, USDA loans for qualifying rural areas, and VA loans for veterans.

You can get these loans from private lenders, but the shopping doesn’t stop quite yet. Lenders provide different terms and interest rates on their loans.

Looking at multiple lenders’ offerings instead of accepting the first offer you find can save you thousands of dollars over your home’s lifetime.

Once you decide on the right mortgage type for your needs and qualifications, you should look at mortgage rates and terms from several lenders before making a decision. 

6. The 30-year mortgage will increase your approval chances

Should you get a 15-year or 30-year mortgage? It’s the question that rattles aspiring home buyers and real estate investors. Each mortgage has its pros and cons, but if you want to increase your likelihood of getting approved, the 30-year mortgage is the better choice.

30-year mortgages have lower monthly payments than 15-year mortgages. Lower payments strengthen a real estate investor’s cash flow and reduce an aspiring homeowner’s post-mortgage debt-to-income ratio.

30-year mortgages are less risky for the lender since the monthly payments are more manageable. They also help the lenders make more money on the loan. Although you pay more for a 30-year loan in the long term and stay in debt longer, this financing option can speed up your path to a mortgage and help you qualify for a higher loan amount.

You don’t have to stick with a 30-year loan throughout homeownership. A homeowner can pay down their mortgage at an accelerated pace or reduce the loan’s duration with a refinance. The 30-year mortgage makes it easier to get your foot in the door and finally get your set of keys.

After buying a home, you can implement several strategies to repay the debt before 30 years and save money in the process. Many investors use 30-year mortgage loans because it increases their monthly cash flow, the most important metric for most real estate investors.

7. A fixed-rate mortgage is the better choice and can protect you from turbulence

Many homeowners and investors look for certainty, especially with mortgage payments.

For most homeowners, the mortgage is the most expensive item on their monthly budgets. Making predictable monthly mortgage payments provides some calm in the midst of homeownership.

Fixed-rate mortgages lock your monthly payment, but some people opt for variable-rate loans, which create more uncertainty.

Variable-rate mortgages have lower initial interest rates than fixed-rate loans, but they increase the borrower’s risk. The interest rates on variable-rate mortgages fluctuate based on changes to the London Interbank Offered Rate (LIBOR) or the Prime Rate. The Fed indirectly influences the Prime Rate rate when they make changes to the Federal Funds Rate (the rate we’ve heard about often in the news lately).