Here is a very quick guide to the things you need to know before you apply for a mortgage.
- What is a good credit score? A perfect credit score is 850; the worst credit score is 300. Anything between 760 and 850 is excellent. 700 to 759 is good. 650 to 699 is fair. Anything below that is likely to be problematic when it comes to getting a good interest rate. One of the fastest ways to fix your credit rating is to pay off the smaller debts that you can control quickly.
- Your debt-to-income (DTI) ratio. You need to be able to show that your debts and income are in line. If your DTI is too high, you can’t get a mortgage. You need to have a DTI under 36% with a mortgage figured in. Calculating your DTI is simple. Add up all your debts, including the mortgage payment you’re working with, and divide that by monthly income. That will give you your DTI. If your DTI is too high, it’s simple to take it down; make large payments to your debts and get things paid off.
- Figure out your down payment. Most people think you need a 20% down payment. The truth is that there are lots mortgages that require much less, as low as 0%. By knowing how much you need to put down, you can figure out how much house you can buy. Many mortgage programs will tell you up front how much you need. Some government loan programs require nothing down. You will also want to make sure that you have enough money for closing costs, etc. You don’t want to get all the way through your negotiations and find out that you don’t have enough money to close your mortgage. Be sure to talk with your loan officer to help determine how much money you’ll need for your down payment.
If you have these three things under control before you apply for a mortgage, your chances of being approved and getting a home you’re happy with will increase significantly.