For most individuals, the toughest part of the home buying process is getting a mortgage, not finding the perfect property. This is because buying a house is usually a rare event, in some instances, once in a lifetime. It, therefore, should come as no surprise that most homebuyers are not adequately prepared for all the mortgage process entails.
Listed below are a couple of things you can do to skip the learning curve and scale through the mortgage process easier.
1. Know your Credit Score
Your credit score is one of the major factors that will affect your approval and the amount you are approved for. Why does it matter? Your credit score tells lenders how you pay your bills and use credit. The higher your score, the more financially responsible you are.
Please note, credit bureaus use slightly different criteria, so you will likely have multiple scores, and these scores will not be the same across the board but it will be close. The following roughly shows how your credit score is determined.
- Credit mix (10%)
- Payment history (35%)
- New credit (10%)
- Amounts owed (30%)
- Length of credit history (15%)
2. Pay off your Debt
When applying for a mortgage, having fewer liabilities makes your chances of success better. Lenders usually look at your outstanding credit accounts and use the data gleaned to assess your creditworthiness.
The success of your mortgage application will be influenced mostly by recurring debts such as credit card payments. Please note, long-term debts, such as a student loan or car payment, can also impact your approval.
3. Determine the Type of Mortgage Loan you need
The type of mortgage you should apply for will depend on the type of property you plan to buy and the state of your finances. However, you would typically have to choose between an ARM mortgage, a fixed mortgage or a construction loan.
An ARM mortgage (adjustable-rate mortgage) is ideal for the homebuyer who is buying a property to live in in the short-term and would like lower monthly payments. An ARM mortgage provides a lower rate on the loan upfront, which makes your initial monthly loan repayment more affordable. With this type of mortgage, the loan rate is typically fixed for a 3, 5, 7 or 10-year tenure.
With a fixed-rate mortgage, the rate of your monthly payment is fixed over the lifespan of the loan. Choosing this type of mortgage will make budgeting for your expenses easier.
Getting a construction loan is best if your intent is to build or remodel your house.
4. Get your Paperwork in Order
Get ahead of your mortgage lender by putting together the following: Your recent payslip, your bank statement (minimum of 90 days) and two years of taxes.
In most instances, lenders also want to see the documentation of your retirement and investment accounts. By putting this together, you’ll fast track the amount of time you’ll have to wait for the approval.
5. Grow your Deposit
Mortgage lenders favour individuals with larger deposits than those without, which usually results in lower interest rates. A small down-payment will only make you spend more money in the long run. So, if you have less than a 20% down-payment, we recommend getting PMI (private mortgage insurance).