August 4

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The Winning Strategy for Mortgaging Your First Home


If you are looking to buy a home through a mortgage, the process may seem pretty daunting at first. However, the more you learn and understand about mortgages, the better you will be prepared to get the right mortgage.

Below, we list 10 things you should know to build a winning strategy for a mortgage. Not only will the knowledge make the application process easier, it will also save you a lot of money.

Figure Out How Much You Can Pay Each Month

Take a good look at your monthly income and current expenses to figure out how much money you can reasonably pay for mortgage instalments. You should account for all your mandatory expenses as well.

For example, suppose your net income after taxes is £3,500 each month. Your living expenses are £2,000 per month and you have existing credit lines on various items that cost you £500. You can afford to make a payment of £1,000 for a mortgage each month.

Calculate Debt to Income Ratio

The debt to income ratio represents your mortgage obligation compared to your net earnings. For example, if you’re monthly mortgage payments are come up to around £700 and your net income is £3,500, your debt to income ratio would be 20%.

This ratio is important for mortgage banks to determine your eligibility. Lenders want to ensure that the burden of mortgage payments is low and doesn’t affect your living standard. Typically, lenders aim for DTI ratio of less than 35% and prefer it if it is lower than 20%.

If your DTI ratio comes up higher than 35%, your lender may ask you to change the loan terms to keep your monthly payments manageable.

Be Aware of Your Credit Score and Keep It Up

Your credit score is one of the most important factors considered by lenders. A good credit score shows that you have been fairly consistent in making payments on time. Your lender will expect the same in the future and happily approve your application.

A low credit score indicates that you have missed payments in the past and your lender can expect the same behaviour in the future. Most mortgage banks will reject application below a certain score or charge you an exorbitant rate for the loan.

Get a Pre Approval

A preapproval is quite similar to a full mortgage approval. The only missing detail is the home property that you are looking to buy.

A pre approval can be very useful while shopping for a home. It tells the seller that you’re a serious buyer who already has the financial backing to close the deal. The pre approval can also help speed up the mortgage process because all your information gets verified by the lender while you negotiate the contract.

Consider the Loan Duration

The term of the loan plays a significant role in the amount of interest you will pay over the years. A 30-year loan is popular because it puts a smaller burden on your monthly financial budget. However, you will pay significantly more interest on a 30-year term compared to a 15-year term.

If you can afford to take the bigger hit, it is advised to keep the loan term as short as possible. The sooner you get the full amount repaid, the sooner you can relax and get out of debt.

On the other hand, interest rates are quite low at the moment and a longer term loan won’t put you that much worse off. The monthly payments will go down significantly and give you a lot of breathing space.

Minimize Credit Card Usage after Submitting a Loan Application

You get two benefits with limited card use. First, you will tend to save more. Buying and paying for a home is not something to be taken lightly. Every penny you will save by keeping a check on shopping habits will help you pay for the mortgage and stay on track.

Second, you won’t inadvertently make any transactions that affect your credit score.

Mortgage lenders will check your score twice. First, they will check it when you submit the initial application to check your score and approve your loan. They will check it a second time just before they wire the funds to the seller.

If you’ve been using your credit card and making a transaction that negatively impacts your score, the lender may reconsider the loan.

Conclusion

We covered some effective strategies for successfully approving your mortgage application. To find out more about buying a home on mortgage, please get in touch on 0207 822 2390.

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