Now that you know some of the financing options available to you, you may be interested to know how to qualify for favorable mortgage terms and get the savings you need to afford a home. Continue on to learn about some of the factors that could impact your ability to get a good mortgage loan and how you can improve your odds of getting favorable mortgage terms:
Your credit score demonstrates your financial risk to lenders. It shows whether you pay your bills on time, how much credit other lending institutions have given you (like credit cards, student loans, auto loans, etc.), and whether you have filed for bankruptcy or foreclosure in the past.
In general, people who have high credit scores (740 or higher) are more likely to get favorable mortgage terms because they are known to have good debt management habits. Those with lower scores may have a harder time getting low interest rates and other good mortgage terms due to:
- Having little credit history
- Missing multiple debt payments
- Having too much revolving credit utilization or other debt
- Having other negative remarks on their credit history, like bankruptcy, foreclosure, or collections
You may be able to raise your credit score to 740 or higher by paying your bills on time, reducing your revolving utilization by paying off credit debt, and getting a credit line increase. The minimum credit score to buy a house can vary from lender to lender. Try increasing your score to meet the FHA minimum credit score to qualify for an FHA loan.
Your DTI is the difference between what you make (your income) and what you owe (your debt). It’s typically expressed as a percentage, and the debt-to-income ratio for buying a house can also vary. Typical ratings are as follows:
- Good: 35% or lower
- Okay: 36% to 49%
- Bad: 50% or higher
Some of the biggest factors that can influence your DTI ratio include your revolving credit card utilization as well as the remaining balances of auto loans, student loans, and personal loans. You can work on lowering your DTI with the following steps:
- Pay off credit cards or personal loans using a tax refund.
- Ask for a raise to increase your income.
- Find a second or better-paying job to increase your income.
- Avoid using your credit cards, and focus on paying them off.
Getting a mortgage with a high debt to income ratio is possible, you just have to shop around through lenders to find these opportunities.
Paying a down payment reduces the amount a lender has to give you in a loan, and you may also get a lower interest rate for having a higher down payment. This can mean thousands of dollars shaved off over the life of the loan.
The average down payment on a house depends on how much the purchase price is, your DTI, and your credit score. Consider seeking out FHA down payment assistance programs to get grants or loans to pay your down payment.