Tips for New Home Buyers: Preparing your Credit for Mortgage

There is always an apprehension that prospective first time home buyers have to deal with: the fact that the home buying process can seem scary. After the 2007 crash, many new home buyers were locked out, by tight lending regulations. That has long changed, and banks are now slinging wide their doors to welcome all prospective home buyers. For anyone considering becoming a homeowner, investing time into adequate preparation before mortgage application will pay off.

Go Through Your Credit Reports

When you first apply for a mortgage, the lender will skim through the application, looking for three things: solid credit history, steady income, and down payment. Before you fill out the mortgage application, find out if there is anything in the credit report that will hurt your mortgage application. If any inaccurate information is present, you can have it rectified from your report, before starting the mortgage application.

Find the Right Loan

There are different types of home loans for different earners. Scan through all the fine details of the mortgage loan that you have in mind before applying. A fixed mortgage is the plain old home financing option, with a higher down payment and set monthly payments. If that’s not for you, you can go for interest-only mortgages. or adjustable rate mortgages. Compare rates and fees between these loans, and decide which is the best fit for you.

Lower Your Debt-to-Income Ratio

The debt-to-income ratio is an indicator used by mortgage underwriters to evaluate your ability to pay off debts. The rate maps out your monthly income against your debt obligations. When preparing to buy a home, reduce your loan payments to about 12% of your monthly income. The fewer debt payments you have, the better chance you have at getting home financing.

Avoid New Debt

Avoid getting into more debt as soon as you decide that you might want to apply for a mortgage loan. New loans and credit cards will greatly lower your credit score, and make you less likely to be eligible for home financing. It is best to hold off on any new credit card applications or emergency loans, at least 12 months prior to your mortgage application.

Mortgage applications often undergo heavy scrutiny by lenders. These preparation measures straighten out your credit score, and improve your chances of getting the best mortgage loan.