Finding the right mortgage deal means saving £100s each month and is, of course, a crucial part of the home-buying process. The key is to do your homework, shop around and compare the details of multiple lenders. But with so many available, how do you decide on what’s right for you? Here, we’re going to take a look at the different types of lenders and how to understand your options so you’re able to make the right choice…
Strengthen Your Credit Score
Your credit score essentially provides a lender or agency with an insight into how reliable you are when it comes to borrowing money. Paying off loans on time or using a credit card responsibly will improve your credit score. The first thing to do is check your credit history and ensure there are no mistakes that might negatively impact your score. However, if your score could use a boost before you apply for a mortgage, paying your bills on time is something you can do to make a positive difference going forward.
Reducing any outstanding credit card balances - preferably to below 30% - can also make an impact. Avoiding new accounts and closing old ones can also help reduce your score, which will in turn help you to secure a mortgage with a lower interest rate.
Know Your Budget
You want to sit down and work out your budget before applying for a mortgage. Lenders will determine a preapproval sum based on your gross income, any outstanding loans you have, plus other debts. What they don’t include in their calculations are other monthly costs like utilities, insurance, daycare and so on. This means that if you are preapproved for a loan, there’s the possibility you’ll be left unable to cover these extra expenses. This is a situation you want to avoid.
When working out your budget, housing costs shouldn’t exceed 28% of your monthly gross, and you should include details of your income, outstanding debts, savings, taxes and insurance costs. Potential lender fees and the size of your down payment are also important factors to consider when creating your budget.
Know Your Options and Compare Multiple Rates
The broad range of available mortgages ordinarily includes options regarding the type of loan, the loan term and the type of interest rate you can expect. Most loan terms are 15 years or 30 years. A longer-term generally means lower monthly payments but higher interest costs overall. If you opt for a fixed rate your monthly payments will stay the same throughout the term, whilst an adjustable rate might start lower but can change over time depending on what’s happening with the financial markets.
When trying to find the right lender, comparing rates and terms is vital to being able to secure the best deal. Important factors to consider are the terms of the loan, the down payment required, mortgage insurance, closing costs and other potential lending fees.
Getting Preapproved For a Mortgage
Getting preapproval from three or four lenders is going to give you a clear and comprehensive insight into the size of the loan you qualify for. Each lender will require a detailed application and will do a thorough review of your credit and finances. You’ll be required to provide a range of documentation, including a photo ID, proof of thirty days of pay, two years of tax returns, sixty days of financial statements, and details of your employment and income history. Details of previous and current debt payments will also be required.
It’s important to remember that a mortgage preapproval is not a guarantee you’re going to receive the size of the loan you’ve applied for. This won’t happen until you’ve formally applied for a mortgage on a specific property, at which point lenders will do an even closer inspection of your finances. This process is called underwriting and usually means re-checking your credit, assets employment and income history.
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