How To Get Approved For Your First Mortgage
Do first-time buyers have it desperately tough in this day and age? Darn right they do because the cost of housing is wildly inflated due to a massive and unsustainable housing bubble, and yet government groups and even banks keep trying to make it easier for first-time buyers to get their first mortgage, which in turn keeps the cost of houses prohibitively high.
If it were not so easy to get a mortgage, then houses wouldn’t be so expensive, and we could go back to the days when hardworking savers were the ones able to afford houses. Here are some tips and plenty of advice to help you get your first mortgage.
Getting Your First Mortgage Is Harder These Days
Even though getting your first mortgage is harder these days, it doesn’t mean it is overly hard. In all honestly, it is still pretty easy. The fact that a single parent of three with a full-time job could buy a house that was eight times his or her salary with no deposit was simply ridiculous. Those days are gone, but if you have a 10% deposit in hand, then you can probably get your first mortgage rather easily if your credit rating isn’t too bad.
Houses, apartments and most types of property are massively overpriced because it is so easy to get a mortgage. If you want a higher chance of success and a higher chance of getting a good deal, then you should plan ahead.
Have A Five Year Plan
Don’t buy your house today–buy it in five years. Between now and then, you need to create and work a plan. You need to decide how much you are going to save each month in order to build your deposit, and you need to decide how you are going to improve your credit rating.
Saving for your deposit doesn’t have to drain your funds and have you living like a homeless person. You can save as little as $200 per month and still have a robust $12,000 in the bank as a deposit when you are ready to buy.
Spend the five years improving yours and your spouse’s credit rating. Get your first mortgage right now with a bad credit rating, and you will get such a bad deal on your mortgage that you will lose thousands. Waiting five years may seem like a loss, but if you improve your credit rating, you will literally save thousands in interest.
Finally, during your five-year period, you need to find a perfect house. Don’t leave it until the last minute. You have five years to search out the best area, the best house prices, the best schools a so forth.
Don’t Rush Any Part Of Your Purchase Or Mortgage Application
The five-year method laid out above is bulletproof for any person or couple wishing to get a mortgage to buy their first home. If you are part of a couple, then the five years gives you both time to thoroughly test out your relationship before making a massive joint investment that is viciously difficult to split if you both break up.
You Need A Mild Understanding Of Today’s Housing Market
Going into any negotiation without any knowledge of the related industry is a big mistake. You are supposed to be able to trust the estate agent that deals with your purchase, but you have to remember that the real estate agent dealing with you is trying to make a living and make a sale.
You do not need extensive knowledge of the housing market or the real estate industry; just bring yourself up to speed with current events. For example, is the real estate agent legally required to tell you everything negative about the house in your state? How easily may your estate agent claim ignorance about house problems? Is the real estate agent being honest when she says that apartments near industrial estates are always in demand by renters?
A Mortgage Lender Will Hide Behind A Computer
Mortgage lenders, such as bank employees, do have some level of control over if you get your first mortgage or not, but if the decision is no, then the employee will hide behind his or her computer. The employee will say the computer rejected you because of your credit rating, your debt, monthly income, or so forth. Sadly, there is little you can do at this stage besides trying a different mortgage lender or waiting half a year while you improve whatever was behind the rejection reason.
What Four Factors Will Affect Your Mortgage Application?
There are probably more than four factors. For example, if you walk into the mortgage broker’s office in rags, then that will probably have an effect. Plus, things such as how long you have had your job and your current address may have an impact too. The four most common factors that affect your mortgage application are below.
The Amount You Want Or Need
One of the most overlooked factors is how much you can afford to pay for your house. It is overlooked because people get so hung up on their credit score, down payment and monthly income, that they forget the value of the house they intend to buy.
For example, if you want a mortgage of $40,000, and you have a so-so monthly income, a little debt and a poor credit rating, then you are more likely to get your mortgage than if you want a mortgage for $140,000. If you have been rejected by two mortgage lenders, then maybe you should wait over six months and try again with a lower amount in mind.
Your Monthly Income
Do whatever you can to improve your monthly income. Can you work more hours or take on a part-time job? If you are applying as a couple, then you should both be working full-time. Ideally, you will have both been working the same jobs for six months. Mortgage lenders are aware that some people will get a job quickly to artificially raise their income, so they need to see that you are going to stick to your job.
There are also your monthly expenses. There should be plenty of places where you may lower your monthly expenses to create more free cash. Take a look at your budget and try to cut back in a few areas so that you have more free cash at the end of the month. Also, you can mention that your rent money will become mortgage payment money when you buy your house.
Your Credit Rating Or Credit Score
The better your score, then the higher the chances are that you will get your mortgage. Over time, you may improve your credit rating. If you are rejected, simply go away and spend a few months improving your credit rating.
The amount of debt you already have will make an impact on your application. If you are not great at handling your debt, then your mortgage lender may assume that your debt troubles will get worse and not better.
The Down Payment You Make
The higher the down payment, then the more likely it is that your mortgage lender will say yes. That is the prevailing theory that most borrowers have, and it is partially true. If you pay more towards the house, then you have more to lose than the bank does, and therefore the bank is more likely to come out on top if you do not pay.
However, savvy mortgage lenders may question where you got your large deposit from. If they suspect that your large down payment is due to a loan, then they will avoid you like the plague.
Clear Your Debt Before You Apply
I know this is easier said than done. For example, you may have loans that still have years to go on them, and if you have credit cards, then you may be stuck in a negative feedback loop where your cards are forever maxed and you are only paying the interest and you find it impossible to pay off any extra without spending it.
You have to look at the bigger picture. Wouldn’t you prefer to enter into a mortgage with a view to paying it off sooner rather than later? The longer you spend paying it off, the more money you pay in interest. Wouldn’t you prefer to be paying money off on your mortgage than on debt?
You may be in a rush to get on the property ladder. The idea of waiting five years to pay off your debt may be unappealing because it means you will be older by the time you pay off your mortgage, but the same is true if you enter into a mortgage while you have debt.
Think about it. If your budget said that 30% of your income went onto your mortgage, and 13% went on your debt, then it is going to take longer to pay off your mortgage than if you were paying 43% of your income into your mortgage. Plus, one year extra paying your mortgage will cost you far more interest than a year of paying your credit card, loan or finance debt.
Pay Off Your Debt – Still Not Convinced?
If I had read the section above when I was 17yrs old and had just left home, then I would not be convinced. I would not have been able to look past the fact that the sooner I get my mortgage, then the sooner it is paid off. Nor could I have looked past the fact that the rent I am paying could be paid into a mortgage. So, here is some math.
Lucy and Burt have a total income of $39,500 per year.
They pay $90 interest on their credit card every month (it is maxed out).
They also pay $166 per month on her 5-year loan.
Plus, they also pay another $127 per month on his 5-year loan.
Their rent is $425 per month.
Family inheritance gave them $10,000. It would have almost paid off all their debt, but they were not confident that they could save up $10,000 again, so they decide to use it as a deposit for a house.
After paying the deposit and other fees, their total mortgage is $110,000.
They pay $551 per month on their mortgage, which is a bit more than what they were paying rent, but still affordable.
It takes them 25 years to pay off their mortgage.
Lucy and Burt pay $383 per month on debt. If they paid that onto their mortgage instead of onto their debt, they would have their mortgage paid off in 13 years.
Let’s Re-Cap The Numbers
The mortgage is a repayment mortgage and it has a 3.5% Annual interest rate.
They pay $551 per month to their mortgage.
They pay $383 per month to their debt.
It takes them 25 years to pay off their mortgage.
They pay $551 per month to their mortgage.
They pay $383 per month to their mortgage.
It takes them 13 years to pay off their mortgage.
They pay off their mortgage 12 years earlier if they are debt free. So, let’s turn back the clock, forget the inheritance, and put you in Burt and Lucy’s shoes. You have the option of paying off your debt first or having a mortgage while you are in debt. If you decide to pay off your debt first, do you reckon you could do it in 12 years? Two of the loans are for 5 years, so they are gone after five years, and the money you are paying on the loans could then be applied to the credit card, which would then take a maximum of two years to pay off.
You could be debt free in five to seven years, and you would have much more money to invest into your first mortgage. You could have your first mortgage paid off in 12 years rather than 25 years.
Conclusion – Mortgage Lenders Know What Is On This Article
They know all the information on this article, and now, so do you. Take a look at the last section about getting out of debt before you apply. Your mortgage lender also knows the power of being debt free before you get a mortgage. They also know how five years of credit building will shave years off your mortgage because you get a better interest rate when you apply.
I am not suggesting conspiracy theories here, but we seem to live in a culture where there is a lot of pressure to get on the property ladder, and it is not in the borrower’s interest to rush into it. The idea of waiting five to seven years before applying for a mortgage is horrifying to some people, especially people over the age of 30, but have you bothered to ask yourself why? I can only assume that the culture of rushing to get on the property ladder has been created and fueled by mortgage lenders.
Use the five-year plan on this article, stick to the plan, and keep your eyes on the prize, and you will shave at least a decade off your first mortgage.