You and your wife have your sights set on that 2-bedroom, single-family home in an upscale golf-course community. You both are in your early thirties, gainfully employed and expecting your first child. There is a unanimous agreement that your baby girl must come of age in a spacious, secure environment with her own room and a lawn around the house to play. You do what most couples in this situation do: approach a bank for a 15-year or 30-year mortgage.
You ask the bank for $600,000 to help you purchase your dream home. There is an unsettling awareness shared by the both of you that you don’t have the detailed credit history that would gain the trust needed for such an exorbitant amount, but you’re praying that you’ll get mortgage approval somehow.
Maybe this is an appropriate time to pause and carefully take stock of things before you make one of the most important decisions of your life. Getting a favorable mortgage approved quickly has become increasingly difficult in a post-2008 world where banks are more cautious than ever in vetting borrowers. This requires you, the customer, to prepare well in advance to develop strong financial fundamentals and a low default risk profile, one that will help you get approved for your first mortgage.
Here are 6 suggestions that will significantly improve your chances to get that mortgage approval.
Don’t Ask for More House Than You Can Afford
Many mortgages are not rejected because the applying parties had poor credit or other red signs such as an adverse debt-to-income ratio. They are rejected because their owners asked for too pricy a house in their very first mortgage application. So, rid yourself of the judgment-clouding desires that home developers are experts in cultivating.
Take a pen and paper and divide the page into two columns. In the left column, write all your assets including your income, property values, stock-holdings etc. In the right column write all your liabilities including taxes, credit card debt, auto-loan pending amount, alimony etc. You can take a couple of days to complete this exercise, so that you do not miss anything and develop the most comprehensive picture possible. With that page before you, ask yourself whether your assets are sufficient to deal with your liabilities and whether you have sufficient leftover to repay the mortgage you are about to apply for? If not, you are asking for too much house to get mortgage approval. Scale down your ambitions from a single-family home to a condo in aid of increasing the chances to get approved for your first mortgage.
Have A Good Credit Score
The bank evaluating your mortgage application will be concerned majorly with your ability to repay the money it’s about to lend you. A credit score below 580 is a big red-flag. If you do not have that mid-700 credit score, it may not always be your fault. Request your credit report from one of the three credit rating agencies and carefully go through it for errors. Are you being dinged points for a payment you made within the grace period but was categorized as late?
A few extra points garnered this way could place you in a better position to get approved for your first mortgage. If you don’t have a good credit score, it may be best to shelve your mortgage plans for now and repair your credit (loan a used car and keep making payments). It is much more in your interest to wait that extra couple of years to repair your credit and get mortgage approval at a lower interest rate than to have one approved on a low credit score at a high-interest rate.
Go Easy on Your Credit Cards
If you plan on landing that low interest, high-value mortgage, know that a crucial consideration for the bank is your debt to income ratio. Maxing out your credit cards, repeated requests for credit limit extensions and cash advances are clear warning signs. Consolidate your high-interest credit card debt and consider using a personal loan to pay off your credit cards.
At the same time, do not close all your credit cards as it doesn’t register well on your credit report and credit history. Use them sparingly and keep their usage below 50% of the credit limit, moving in the direction of 30% to improve your chances to get mortgage approval.
Hold Down A Steady Job
Have you been out of work in the past few months? Do you believe in jumping ship every few months at the first whiff of better pay? Have you moved around frequently? All of these can reduce your chances to get approved for your first mortgage as a bank usually views this as behavior that increases your default risk.
No Major Loans Leading to Your Mortgage
In the months leading to your mortgage application, do not take on other liabilities such as a loan for a brand-new car. Even if you demonstrate sufficient repayment capacity after taking on the loan, every liability puts upward pressure on your debt-to-income ratio. The higher it gets, the greater the chances that you could be charged a higher interest rate even if your mortgage does get approved.
Pay A Higher Down-Payment
Most mortgage providers require you to pay at least 10% of the total value of the house upfront as down-payment. If you want to enhance your chances to get approved for your first mortgage, consider making a higher down-payment. A customer applicant, like you, offering to pay 20% upfront will stand out in an applicant pool struggling to cobble together 10% of the total home value.
Getting your first mortgage granted by the bank takes a bit of strategic planning. No longer is it possible, like earlier times, when all you had to do was walk into the bank and demonstrate the bare minimum competency to get approved for your first mortgage. To get mortgage approval today requires good earning capacity, favorable debt-to-income ratio, job tenure stability and an overall low financial risk profile. Careful planning in the years leading to the application can give you that perfect, low-interest mortgage leading to thousands of dollars in saved interest payments over the lifetime of the mortgage.