Are you thinking of buying a home in the Atlanta area or refinancing your mortgage in the near future? Whether you are a first-time home buyer, ready to move up to a bigger property or wanting to refinance your existing mortgage loan at a lower mortgage rate, there are several key steps you can take to prepare for your mortgage loan application. You will want to optimize your financial situation to qualify for the lowest possible mortgage rate.
We Have Identified 4 Items You Should Focus On Before You Apply For A Mortgage Loan:
- Debt Reduction
It is a very good idea to reduce your existing debts as much as possible before buying a home. A mortgage loan allows a home buyer to purchase property with low-interest debt paid off over a longer period of time (typically 30 years for most home loans). To qualify for a lower mortgage rate, you will want to reduce your other high-interest debts as much as possible. We’re talking about credit card balances which may have interest rates as high as 20% or more. We’re also talking about student loans, car loans and other lines of credit you may have taken out.
Minimize your existing debt and decrease what’s known as your debt-to-income (DTI) ratio. Your DTI is calculated by adding up your total monthly minimum debt payments and dividing that total by your average monthly income. Most mortgage loans will require your DTI to be lower than 40-50%. The lower it is, the better off you will be when applying for a home loan.
- Saving for a Higher Down Payment
Another factor that can get you a much lower mortgage rate is having a higher down payment. Even if you qualify for low-down-payment mortgage programs like FHA loans (or zero-down options like USDA and VA loans), you will still want to save up and apply as large a down payment as you can comfortably afford.
A bigger down payment can help you secure a lower interest rate on your home loan. It can also minimize how much mortgage insurance (PMI or MIP) that you need to pay. Typically, these insurance payments are required when you apply a down payment of less than 20% of the loan value. These monthly premiums are tacked onto your monthly mortgage payments until you have reached the predetermined payout threshold (usually at least 20%).
- Credit Score Improvement
A higher credit score (aka FICO score) can also help you qualify for a lower mortgage rate. You may be able to get an FHA loan with a credit rating as low as 500, but you will be paying a higher fixed interest rate and you will generally be required to have a down payment of at least 10%. Other first-time home buyer programs and government-backed mortgages may require minimum credit scores of 620 or higher. A healthy credit score shows you are trustworthy at making your payments on time and this is something mortgage lenders like to see. Take the steps now to increase your FICO score before you apply for a home loan.
- Secure Steady Employment and Income
One of the other major factors a mortgage lender will review is your employment and income history. Unemployed borrowers will find it difficult to qualify for a mortgage loan. You want to show that you can hold down a steady job and/or you have a consistent source of income to make your monthly mortgage payments on time. USDA loans are designed for rural home buyers with low-to-moderate incomes. However, they require higher credit scores and lower DTI to offset the risks of a lower-income borrower.
These are some of the most important factors to consider when preparing to buy a home. You’ll want to improve your financial situation as much as you can and then talk with a reputable mortgage lender. You can get pre-approved for your mortgage loan and lock in a lower fixed mortgage rate before you start searching for homes in your price range. Take these steps and you will be well on your way toward home ownership.
The same factors are also important when applying for a home refinance loan. The goal of a refinance is to get the lowest mortgage rate possible. This can allow you to significantly lower your monthly mortgage payments and/or shorten the term of your loan (say to a 10- or 15-year payoff period instead of another 30 years). Having a higher FICO score, lower DTI and strong income/employment situation will be crucial to qualifying for a lower interest rate. Your home equity will also be a key factor as you can leverage that value toward your refinance loan.
If you have questions about mortgage loans in Atlanta or think you are ready to apply for a mortgage pre-approval, contact Moreira Team | MortgageRight today. We will guide you through the process and help you make the best mortgage decisions.