Build strong credit
When it comes to securing a loan at the best mortgage rate, credit is king. The most important focus for all potential buyers should be improving their credit score. A low score can prevent someone from buying a home or at least from qualifying for an affordable mortgage rate.
Demonstrate ability to save
Future buyers should create a simple budget and set a savings goal.
If you can save $300 a month, you will have $3,600 at the end of the year. Lenders want to see that pattern of savings, and buyers will need at least 3.5 percent for a down payment on an FHA loan or at least 10 percent for a conventional loan.
Set up an automatic transfer of funds into savings through your employer or your bank.
While buyers increase their savings, they should also reduce their debt.
Paying off debt tops saving in terms of priorities because of the interest payments on the debt, which exceeds the amount of interest you can earn on your savings. Lenders want to see that you are managing your debt and keeping your credit card balances low.
Keeping an eye on the debt-to-income ratio is an important element in a loan approval. This ratio compares minimum monthly payments on all debt to gross monthly income.
If your debt-to-income ratio is over 50 percent, you need to pay off your debt before even thinking of buying a home. Some companies will relax their standards for borrowers with a strong credit score or substantial cash reserves, but in general, FHA will only go up to 43 percent and conventional lenders will only go to 41 percent for the overall debt-to-income ratio.
While it might be premature to visit a lender two years before a home purchase, it can be valuable for consumers to know if they qualify for a mortgages.
Take the time to visit open houses. A lot of people have no idea what $100,000 or $200,000 will buy, so the more they look at places and neighborhoods, the better understanding they will have of the value in a home.
Obtain a free credit report
To improve their credit scores, buyers should pay off past-due bills, pay every bill on time and reduce their balances to less than 30 percent of the credit limit on every account. Also, it is best to have three to five credit accounts, such as a car loan, student loan or credit card, for one year or longer.
Refrain from frequently switching credit cards to get the best rate, though.
Lenders do not want to see a lot of credit inquiries or too many new accounts because this could indicate someone who is about to take on a lot of extra debt.
Beware the pitfalls people often do not realize the consequences of paying bills late or missing a payment, which can stay on your credit report for a long time.
Every consumer should establish three lines of credit such as an installment loan and a credit card or two, keeping the balance low and paying them on time, in order to generate a strong credit report.
Practice making house payments
Future homebuyers should make “virtual” mortgage payments today as a way to build up savings and learn to budget for actual mortgage payments down the road.
Renters can estimate a mortgage payment and set aside the difference between that payment and their rent each month. If they are paying $800 in rent and estimate their mortgage will be $1,100, they can put $300 per month in a special savings account. Not only does this help them save for a down payment, but it demonstrates to a lender their ability to afford that higher housing payment.
Source: By Michele Lerner • Bankrate.com