Can you afford a home? How much house do you need? Will your dream home disappear from the market faster than you can snatch it? The homebuying process is filled with concerns and what ifs.
One major worry you may have is whether you will be approved for a mortgage. According to a recent survey we conducted, homebuyers cited approval as a primary concern when asked about which aspects of finding a lender make them most anxious.
The good news? Take these steps to substantially increase your mortgage approval odds.
Keep debt low
One important metric lenders look for when you apply for a mortgage is your debt-to-income ratio (DTI). Calculate your DTI by dividing the total of your monthly debt by your gross income. Rent, current mortgage payments, car payments, student loans, child support and credit card minimums should all be included as part of your debt.
A favorable DTI for a conventional loan is generally 36% or less. You may qualify for a mortgage with a DTI up to 50% depending on your overall financial situation and credit score. If you’re a low- to- moderate income buyer, you may qualify for an FHA loan, which generally accepts borrowers with DTI ratios up to 43%. This type of mortgage can be a good option for first-time homebuyers.
Build and maintain a good credit score
You’ll also want to make sure your credit score is in tip-top shape when applying for a home loan. For most loan types, a credit score of at least 620 is required. The higher your score, the more mortgage options you’ll have. Meaning various loan terms and potentially lower interest rates. If you want the best possible rates, aim for a score of 740 or higher.
To qualify for a jumbo loan, you need a score above 700. You may qualify for some loan types with a lower score, such as an FHA loan with a 3.5% down payment, which only requires a minimum score of 580.
To improve your score, work on keeping your credit utilization less than 30% on credit cards. Always make payments on time and monitor your credit report frequently to catch any issues or mistakes.
Save for a larger down payment
The amount required for a down payment depends on your loan type. While 20% used to be the gold standard, you can now get a home loan with as little as 3% down, including through the Ally HomeReady mortgage program.
The more you can put down, the better. Bigger down payments will result in lower monthly mortgage payments, better interest rates, fewer upfront fees and lower closing costs. A higher down payment also acts as a better hedge against declines in real estate values. The more you put down, the lower your chances that a slight dip in the market will put you underwater on your mortgage. (This is when you owe more on your mortgage than what your house is worth.)
When it comes to sourcing a down payment, don’t be afraid to think outside the box. In addition to slowly saving up, consider down payment assistance programs and tapping into retirement funds. First time homebuyers can tap into a Traditional IRA, up to $10,000, without being subject to the additional early distribution tax, to make a down payment.
Get a head start
When it comes to financially preparing to buy a home, the sooner the better. Don’t let anxiety about the process stop you from taking the first step. The journey to home ownership is a marathon, not a sprint. When you break it into manageable pieces, you’ll reduce your stress.
The earlier you start building your credit score, paying down debt and saving for a down payment, the easier it will be to reach your goals. Plan to start working on your mortgage readiness program at least six months before you apply for a home loan.
Increase your odds with a step-by-step plan
Getting approved for a mortgage is a crucial step in the journey to buying a home. Once you’ve conquered all the what ifs, you can focus on the fun aspects of buying a new home, like picking out paint colors and designing a backyard oasis.
If you’re ready to make your dream of home ownership a reality, ensuring your finances are in order will increase your odds of qualifying for a home loan.
Ally Home is here to help make your home ownership dreams reality.