If you’re in the market for a mortgage, certain criteria may help you get a better interest rate and save money over the long haul. Since just a few percentage points can translate to thousands in savings throughout the life of your loan, consider these strategies to help you put your best foot forward when applying for a mortgage.
Build your credit score
A good credit score is a critical part of impressing your lender. While a subpar score won’t prevent you from getting a home loan, a good score can help you get a better interest rate and save thousands in the long run. According to Bankrate contributor Jennifer Bradley Franklin, lenders prefer borrowers with a credit score of 740 or higher. To boost your credit rating, keep your credit card balances below 20-30 percent of your limit, pay all of your bills on time, and consider signing up for a service that reports your timely rent payments to the credit bureau. You may also want to consider regularly checking your credit report for errors. If you find any, have them corrected before you get the ball rolling on the mortgage application process.
Pay down your debt
Mortgage lenders consider many factors when calculating the size of your loan. Your debt-to-income ratio is particularly important because it indicates your ability to take on additional payment obligations. You can calculate this figure by taking your total recurring monthly debt payments and dividing that number by your monthly gross income.
A low debt-to-income ratio shows that you have the capacity to take on monthly mortgage payments. Investopedia contributor Jean Folger explains that lenders prefer borrowers with a debt-to-income ratio of 36% or lower — and that prospective borrowers with a ratio above 43% will likely have trouble getting a qualified mortgage. To improve your ratio, consider pinching pennies and applying more of your income towards paying down debt. You can also work towards increasing your gross income by picking up extra shifts at work or seeking a pay raise.
Save up for your down payment
By bringing a large sum of cash to the table, you can reassure your mortgage lender that you’re responsible with money. A hefty down payment also improves your loan-to-value ratio, which lenders consider when determining whether or not you qualify for a loan. The larger the down payment you make, the easier it is to qualify for a loan — and enjoy favorable borrowing terms, like a low-interest rate. On top of that, Folger explains that by putting at least 20% down on your house, you can save big in the long run, since you won’t have to pay for mortgage insurance.
Have your records in order
Lenders use your records to verify that your statements are truthful and that you have the means to manage your mortgage. Prepare to show your pay stubs from the last 30 days and your W-2 forms from the last two years. If you earn any bonuses or commissions, you’ll have to include proof of that. If you’re self-employed, Franklin suggests showing the lender your tax returns, along with your profit and loss documents.
With some savvy financial management, you can impress your mortgage lender and take the next step towards home ownership. For more guidance, contact your local financial institution’s mortgage department.