Securing your first mortgage is truly one of life’s milestones. Being able to carry a six-figure loan indicates that you have achieved well-regarded levels of prosperity and responsibility. It might sound surprising, but many young professionals consider their first mortgage approval as one of their proudest moments.
Before you apply for a mortgage, there are a number of measures that first-time and seasoned buyers alike can take to ensure they qualify for the best mortgage possible. Keep in mind that reducing your mortgage rate by just one percent can save you thousands of dollars over the life of your mortgage.
The primary focus for all prospective buyers should be to exhibit an ability to manage their personal finances within your current income environment. Mortgage lenders look at your debt-to-income (DTI) ratio to determine how much you can afford to borrow. This ratio is calculated by dividing your monthly gross income by the amount you use to pay off debts such as auto loans, student loans, and credit card balances each month.
Your ability to hold and manage debt/credit plays a major part in determining how favourable of a rate a lender is willing to give you or if you are able to carry a mortgage. Lending institutions rely on your credit score – a three digit number that reflects the history of how you’ve paid your bills, how much open credit you have, and anything else that would affect your creditworthiness. Using this formula, lenders feel they can predict with considerable accuracy how comfortably the borrower can carry the mortgage as well as how likely he or she is to repay the loan.
You should never apply for a mortgage without first getting your credit reports. The primary reason is to ensure there aren’t any errors or discrepancies. Errors on your file can force you to pay a higher interest rate on your mortgage and in some cases even torpedo your chances of getting a loan altogether. You could discover accounts that aren’t even yours, or collection accounts for debts you no longer owe.
Once you’ve confirmed the accuracy of your credit report, you can now begin to take steps to improve your credit score in the months leading up to your purchase.
Thirty-five percent of your score is determined by your payment history. Consistently being late on your credit card payments will significantly hurt your rating. Do your best to keep the balance on your credit cards under a quarter of the total line of credit. At the very least pay your credit card bills on time to preserve a respectable score. If possible, pay off the balance entirely and promptly, even if it means using some of your money for the down payment. Don’t close the credit card accounts when you pay them off, however. Closing credit accounts can negatively effect on your credit score.
The second most important part of your credit score is your level of debt. You should look to pay down student or car loans that may be keeping your score down. Mortgage advisors will always encourage first-time buyers to limit their major purchases on credit until after they’ve secured their mortgage. You might want to push back that new car(s) until after you’ve bought your first home! As a first time home buyer, extending your unsecured credit to the maximum by buying one or more new cars before you get your first mortgage will almost always force you to remain a renter, and have you paying someone else’s mortgage for years to come.
Don’t apply for more credit than you need. Too many open or unused accounts can hurt your chances of getting a mortgage. They can also be a major temptation to “live beyond your means”. Whatever you charge or borrow must eventually be repaid. Don’t dig yourself into a deep financial hole.
Many young professionals who’ve been renting or living with parents don’t have much of a credit history. If this is this case, it might not be a bad idea to have one or more of your many utilities in your own name. While just having your name on an electric or gas bill, telephone, cable, or water service won’t establish a credit score, it can still be helpful for a first-time borrower.
The best thing you can do is to get a credit card and use it with the utmost prudence. Simply using it in place of money you actually have on hand, then using that cash to make your monthly payments can go a long way to helping you establish good credit history. It takes time and there are really no shortcuts or tricks that can take you from bad credit or no credit at all to a high score in a matter of months or even a few years. So, while it is important to initially establish credit, it is even more important to take the time to do the right things to maintain good credit.
Securing a good mortgage doesn’t have to be burdensome or disheartening. If you take the necessary steps to tidy up your financial affairs, you will find all aspects of home ownership, not just your mortgage, to be relaxing and rewarding.