Every first-time homebuyer needs to know the three key factors that can impact their mortgage application process. This process is one of the most critical parts of buying a home. After all, it’s what actually lets you purchase the property!
Here are three key factors that can significantly impact your chances of getting approved and closing on a home:
1. Debt-to-Income Ratio: This is the ratio of your monthly debt payments to your monthly income. Lenders use this ratio to see how well you’ll be able to pay your current debt and pay for a new mortgage on top of it. To find your debt-to-income ratio, sum up all of your monthly debt payments like credit cards and other loans, and divide that by your monthly income. Then multiply by 100 to find the percentage. Lenders generally like to see debt-to-income ratios lower than 40%
To lower your debt-to-income ratio, focus on paying off high-interest debt first. Additionally, make sure to not take on more debt during the mortgage application process as this can increase your debt-to-income ratio and jeopardize your mortgage approval.
2. Credit Score: This is one of the criteria lenders use to determine what your interest rate will be on your mortgage, which has a big impact on your monthly payment. A higher credit score will help you score lower interest rates and better loan terms. A low credit score, on the other hand, will increase your interest rate and impact your chance of getting approved.
To improve your credit score, make sure to always, always pay your bills on time! In addition, try to decrease your credit utilization to at least 30%. During the mortgage application process, the biggest thing to avoid is opening any new lines of credit–like a credit card or a car loan. This lowers your credit score and is a big red flag for lenders.
3. Employment: Lenders want to see a stable job history and consistent income. The more stable your income is, the more likely you’ll appear to be able to consistently pay down your mortgage. During the mortgage application process, avoid quitting or switching jobs! Big employment changes are a red flag for lenders and can jeopardize your mortgage application.
By understanding these factors and taking proactive steps to improve your finances, you can increase your chances of a successful mortgage application and achieve your homeownership goals.
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