Preparing to Apply for a Mortgage

For many people, owning a home can be a great investment that has many benefits. Most people do not have enough money to purchase the home up front, so they get a special type of loan called a mortgage.

A mortgage uses the actual home or the land as collateral for the value of the loan. Purchasing a home is a big decision and before jumping in and getting a mortgage, there are several things the borrower should do.

Minimize Current Debt

Before applying for a mortgage, one of the most important things to do is try to minimize your level of debt. This is because one of the things a lender looks at is how much debt you have and your payment history. If you already have a great deal of debt or have a poor payment history, they might not be willing to offer you a loan or you may not be able to receive the best rates.

If at all possible you should begin by paying down your credit card balances as much as possible. If you have any problems on your credit report, such as an unpaid bill, you should also pay these off before applying for a mortgage. This will increase your chance of qualifying for the loan and receiving the lowest interest rate possible.

Begin Saving Money

It can also be a good idea to save some money aside from the money you are saving for a down payment, this can be used in the event that there is some sort of emergency. Usually most financial advisors recommend that you have enough money to live for 4 to 6 months, paying your utilities, groceries, and mortgage, without working.

Figure Out What You Can Afford

Once you have taken care to lower your risk factors, such as outstanding payments or credit card debt, it is a good idea to get an idea of how much you can afford for a monthly payment, because this will help you determine what type of home you will be able to afford.

It is not uncommon for both lenders and real estate agents to try to push as much debt as possible onto the borrower, because this is in their best interest, but it is not typically in the best interest of the borrower. So, ensure that you have an idea of what you can afford before you begin shopping for a mortgage.

Commonly, it is recommended that your monthly mortgage payment does not exceed 28% of your gross income, including that of your spouse. There are a number of other costs associated with owning a home, such as repair and maintenance, and the 28% figure typically allows for these expenses, as well as those of daily living.

The Ups and Downs of Real Estate Property Values

Since the more you borrow, the more the lender makes, they might try to convince you that you can afford more than this. Leading up to the current financial meltdown, many lenders were telling people that 30% or even 40% was acceptable, arguing that the home would always increase in value, so this was no problem.

Now, however with the current slump in homes values, this is no longer the case, so remember to have an idea of what you can afford and look at any effort on the part of the lender or real estate agent to increase this with skepticism.

Once you have your current credit load as minimized as possible and have an idea of what you can afford in terms of a monthly payment, you can begin shopping around for loans and try to find the best possible deal.