Knowing When to Apply for a Mortgage
Knowing When to Apply for a Mortgage
April 20th, 2011
Buying a home for the first time can be a stressful process, especially without the proper financing. The majority of homebuyers use mortgage loans to finance their property purchase, and only a small percentage actually pays the entire purchase price in cash. Of course, individuals who can easily afford to purchase a property in cash would not necessarily need a mortgage, as a loan would simply increase the total purchase price in the long term. Thus, for most people the question is not “is it the right time to apply for a mortgage?” but “is it the right time to purchase a property?” The answer to this question depends on a variety of factors, both personal and external, relative to the current state of the homeowner market. Anyone having trouble deciding whether to purchase a house or continue renting should utilize the following tips.
Consider Current Credit Score
Before approving an applicant for any type of loan lenders check their credit score and credit history to ensure financial reliability and minimize the risk of default. Although it is possible to obtain home financing with bad credit, the general rule of thumb is that lower credit scores yield higher interest rates and less lenient repayment terms. While the credit rebuilding process can take anywhere from several months to several years, depending on the extent of debt that needs to be repaid, the process of repaying a mortgage usually takes anywhere from 15 to 30 years. Therefore, aspiring homebuyers with mediocre to poor credit should consider raising the credit score before purchasing a home, as the interest rates obtained while the credit score is low could add thousands of dollars to the total purchase price in the long term.
Determine a Mortgage Budget
Most people tend to exaggerate their current investment capabilities, ultimately falling victim to debt after overburdening themselves with expenses. To avoid such an occurrence experts recommend determining a mortgage budget by multiplying the average annual income by two. For example, an individual who earns $30,000 per year could safely apply for a $60,000 mortgage. Sadly, most homebuyers apply for mortgages which are more than four times their annual income, and this is most likely the cause of the high rate of foreclosures seen in today’s market.
Calculate LTV to Obtain Ideal Rates
Homebuyers should also consider the loan-to-value ratio (LTV), which is the percentage of the total purchase price that the mortgage consists of (i.e. – an $80,000 mortgage for a $100,000 property would carry the loan-to-value ratio of 80%). Experts recommend keeping the loan-to-value ratio below 60% to obtain ideal interest rates, as lenders use it to determine loan terms. Obviously, homebuyers who need to borrow more are typically less financially stable and are therefore a higher default risk. So, an individual that earns $30,000 per year could feasibly afford to purchase a $100,000 home using a $60,000 mortgage without exceeding twice their annual income or a 60% LTV.
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