Getting the right home loan is very important if you’re thinking of buying a house. The good news is you can be a homeowner even if you don’t have a swimming pool full of cash. There are plenty of affordable home loans in the housing market today that would be ideal for you.
But getting a good mortgage involves a lot more than comparing your options. You need to consider what interest you’ll have to pay, your FICO score, and various other factors that will determine if you qualify for a mortgage or not.
To make the process a lot smoother for you, we’ve curated a list of tips to help you get a great mortgage rate within your budget.
1. Consider getting an FHA home loan
A good alternative to getting a conventional mortgage is an FHA home loan. FHA home loans are designed for loanees who are not eligible for a conventional home loan.
You need a minimum FICO score of 620 to qualify for a conventional mortgage. With an FHA home loan, you need at least 500 to qualify.
2. Get your credit report
Start by requesting a credit report at least 6 to 8 months before you apply for a mortgage, and check for any possible errors. You might find mistakes that are denting your credit so don’t assume the data is correct.
Watch out for outdated info or info that is possibly not yours due to a mistake or identity theft and fix them if you find any.
3. Improve your credit score
Boosting your credit score is one of the best things you can do if you not only want to get a loan but one with an attractive interest rate.
The higher your credit score, the better your mortgage rate. Even the slightest boost can improve your credit score. For instance, if you had a FICO score of 650 and increase it to 680, you could reduce your interest rate by more than 0.60%.
To improve your credit score, make sure your bills are paid on time and reduce the amount of debt that you owe.
4. Make a big down payment
Nothing impresses a lender more than the seriousness of a considerable down payment. A big down payment will reduce the LTV (loan to value) ratio and better your chances of getting a great mortgage rate.
The LTV ratio is calculated by dividing the home loan amount by the buying price of a house. For instance, picture a scenario where you want to buy a house for $120,000, you put down $30,000 (25%) and ask for a mortgage worth $90,000. Your LTV ratio would be 75%, or 0.75.
But if you make a down payment of $45,000 and ask for a mortgage of $75,000, your LTV ratio will decrease to 62.5%, bettering your chances of qualifying for a lower mortgage rate.
Save thousands on a home loan the smart way
Interest rates won’t stay as low as they are today for much longer hence the need for you to take action today. The tips highlighted above should help you qualify for a home loan that’s right within your budget.
Remember to hold off on any big purchases before your application is approved since lenders tend to make a final credit check.
Story by Brad Bernanke
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