Each year, millions of people apply for a mortgage and purchase a home. This, however, shouldn't convince you that getting a home loan is a piece of cake. In reality, a mortgage is one of the hardest loans to qualify for. But if you make these money moves before meeting with a lender, you can swing the odds in your favor.
1. Pay off debt
Getting approved for a mortgage doesn't require zero debt, but the more you currently owe, the harder it can be to qualify for a desired amount.
To avoid any roadblocks along the way, come up with a clearsighted plan to pay off as much of your debt as possible, especially credit card debt. A high credit utilization ratio — which is your credit card balance compared to your credit limit — can lower your credit score and make it difficult to qualify for a mortgage or trigger a higher mortgage interest rate.
As a personal goal, keep credit card balances below 30 percent of your credit limit. To attain this, stop using cards and pay more than your minimums every month. Also, ask creditors to lower your interest rate. If you can pay less interest, you'll reduce the principal faster.
Take it a step further and make higher monthly payments on other types of debts as well, such as a car loan, student loan, etc. This is to your advantage because the less expenses you have, the easier it'll be to adjust to a mortgage payment.
2. Determine what you're comfortable spending
Your mortgage lender decides an affordable amount based on your income and existing debt. Still, it helps to have an idea of what you are comfortable spending on a house before meeting with a bank. Typically, banks allow borrowers to spend between 28 percent and 31 percent of their gross monthly income on a mortgage payment.
Do the math and calculate 31 percent of your gross monthly income, and then review your budget to see if you can realistically afford this amount on a monthly basis. After determining a comfortable monthly payment, use a mortgage calculator to estimate the maximum you can borrow based on the desired payment range.
3. Devise a savings plan
Qualifying for a mortgage entails money — lots of it. Not just money for the monthly payment, but also cash for a down payment (between 3.5 percent and 20 percent of the home's value), plus there's the cost of closing. These fees can run