Acquiring a mortgage loan is not easy because lenders’ criteria to sanction such loans are often not met by the borrowers. Especially when you are thinking of buying a home, which is probably the most significant single financial investment that you will ever make in today’s time, you will need a mortgage to procure the home loan. But, before going deeper into the mortgage loan subject, isn’t it better to clear the meaning of mortgage loan first?
A mortgage loan is a kind of secured loan where you receive funds by keeping your assets of the same value as the loan amount as collateral to the lender. A mortgage loan is primarily offered against an immovable asset, such as a commercial or residential property. The lenders of such loans keep the mortgaged asset as collateral until you fully repay the loan amount, i.e., Principal + Interest.
There is no guarantee that when you apply for a mortgage loan, you will qualify for it in the first place. However, there are specific steps that you can take and improve your chances of procuring the mortgage loan you want in the eyes of the lender.
Top 5 Tips To Improve Your Chances Of Getting Mortgage Loan
1.) Examine your credit report:
Lenders will first review your credit score before sanctioning a mortgage loan to know about your credit history in detail and to determine whether or not you are eligible for the loan and, if yes, at what rate. Three big credit rating agencies, namely Experian, Equifax, and TransUnion, which per the law, entitle you to get one credit report (per agency) every year. If you can sway your requests, you can ask for credit reports once every four months rather than simultaneously and keep a strict eye on your credit report throughout the year.
2.) Resolve the mistakes, if any:
Do not mistake yourself for the credit report to be 100% accurate. Instead, scrutinize the whole report for mistakes that could negatively impact your credit. The main points you must check for are:
- Debts that are already discharged or paid.
- Information that does not pertain to you but is mistakenly printed in your credit report. This may happen if you have similar names and/or addresses or due to the wrong Social Security Number.
- Information coming from a former spouse whose mention should not have been made anymore.
- If there’s mention of any outdated information.
- Any information that is not related to you because of identity theft.
- Incorrect notations printed for closed accounts like it’s you who had closed your creditor’s account, but in your report, it might show that the creditor has closed it.
You should check your credit reports at least six months before you plan to take a mortgage loan so that you get enough time to rectify the mistakes, if there are any. While under scrutiny, if you discover some mistakes in your credit report, immediately contact your credit agency to report them about the mistakes and get them corrected as soon as possible.
3.) Be prudent and wise to improve your credit score:
A credit report summarizes your history of paying debts and other bills. The lenders are the only document they look for to evaluate your credit risk and ascertain how good you are in repaying your loan on time. FICO score is the most common credit score, calculated using different parts of credit data from your credit report, which are:
- Payment history – 35%
- Amount owed – 30%
- Length of credit history – 15%
- Credit mix – 10%
- New credit – 10%
The thumb rule says, the higher your credit score, the better the mortgage rate you can expect. To start with, you must thoroughly examine your credit report and fix the mistakes, if there are any, and then start paying your debt sincerely.
You can set up payment reminders so that you do not miss paying debts on time. You should also keep your revolving credit and credit card balances low and reduce the amount of debt you owe, i.e., limit your use of credit cards to emergencies only.
4.) Decrease your debt-income (D.I.) ratio:
A debt-to-income ratio gives you a comparison of the amount of debt you owe to your total income. Its calculation is done by dividing your total monthly recurring debt by your total monthly income and representing the unit percentage. The use of debt-income ratio for lenders is to ascertain your ability to manage the payments you make per month and decide the amount of house you can afford.
A low debt-income ratio indicates you have a good balance between debt and income. Lenders prefer the debt-income ratio to be 36% or below, where not more than 28% of the debt goes towards mortgage payments. This is known as “front-end-ratio.” In several cases, the highest debt-income ratio that can make you qualify for a mortgage loan is 43%. However, any D.I. ratio above 43% will make lenders deny your loan application stating that your monthly expenses are way above your income.
To lower your D.I. ratio, you have the option to do two things, i.e.
- Lower your recurring monthly debt.
- Increase your total monthly income.
For the first point mentioned above, you have to purchase less and carefully monitor where and how much of your income goes each month. This shall help you understand where to save money. Whereas, to increase your monthly income, you can look for better pay opportunities or learn high-paying skills.
5.) Increase your down-payment:
Paying a large amount of your loan as down payment reduces the loan-to-value ratio, which in return increases your chances of getting the mortgage loan. This loan-to-value ratio is computed by dividing the mortgage amount by the buying price of the house. If the home appraises for a lesser amount than what you thought to pay, the denominator shall be the appraised value.
For example, you planned to buy a house for $200,000 where you paid 20% of the value, i.e., $40,000 as a down payment and decided to take a mortgage loan for the remaining 80%, i.e., $160,000. Here, the loan-to-value ratio would be $160,000 |(mortgage amount) / $200,000 (total value of the house), which comes to 0.8 or 80%. Therefore, the higher your down payment value, the lower will be your loan-to-value ratio.
A larger down payment and lower loan-to-value ratio can bring you your mortgage loan with better terms, such as less interest rate over the life of the loan and smaller monthly payments. When you decide what amount to pay down, remember that 20% or more of the loan paid as a down payment would save you from getting subject to a mortgage insurance payment, which will help you save more money.
The Last Lines
Currently, securing a mortgage loan has become more difficult due to the imposition of tighter lending practices. However, you can take steps to improve your chances of securing the mortgage you want. Strictly follow the above five tips, and you shall see your lender sanctioning a mortgage loan for you.
Author Bio: Hanna Flores is a passionate blogger. She loves to share her thoughts, ideas, and experiences with the world through blogging. Hanna Flores is associated with Techrab, World News Inn & Exclusive Rights.