Checklist Before Applying For First Time Home Loan
Do you want to grab the best first time home loan deal? Here’s how to improve your chances of getting approved for a mortgage you can afford.
List your assets
To qualify for a first time home loan, lenders would want to know your monthly income. Whether or not it is sufficient to meet your monthly mortgage plus other debt obligations will determine the amount you will qualify for. When listing your assets, don’t include car which is still on loan, or other assets that serve as collateral. Lenders are looking for liquid assets or those that you can easily dispose or convert into cash when you need it most. In short, they want to know your debt-to-income ratio. So, if you have a monthly paycheck from a full-time job, wages from your part-time gigs and daily or monthly income from your own business—include them in the assets list. Get the total of all your assets.
Compute your total fixed expenses. Include the following in the liabilities list:
- Car payments
- Child support
- Consumer debts
- Credit cards
- Student loans
- Utilities (water, electricity, cable, internet, etc.)
- Other personal loans
While the credit provider is interested in the front-end ratio, or your debts divided by your income, (debts/income=front end ratio), the lender would still compute the back end ratio. It is the amount of your total debts plus your anticipated monthly mortgage payment divided by your income. Most lenders require a back end ratio lower than 43% and a front end ratio below 31% to get approved for a first mortgage.
Let’s say, you have the following debts:
Credit card: $200
Personal loan: $100
If your income is $1000, your front end ratio is 30%. If your anticipated mortgage payment is $100 per month, your back end ratio is 40%, which means that the lender will most likely approve your home loan application.
Decide if a first time home loan is the best way to acquire a new asset
There are many lenders offering second mortgages to qualified applicants. Many home buyers aren’t aware that their old houses, and ideal properties can benefit them more than a first time home mortgage would in certain circumstances. For example, if you already paid off more than 70% of your first mortgage, it means you have a good amount of equity that you can use to secure a bug amount of loan. Refinancing those loans may cost you lesser overall loan cost compared to a first mortgage. It will also allow you holders of various credit accounts to consolidate their outstanding debts.
Cash out refinancing truly makes sense if you will use it for long-term goals such as big home improvement projects like additional rooms that you will put out for rent. Ask your potential lender about the availability of cash out refinancing, or a mortgage loan which is higher than the purchase amount. It will help you pocket the difference and use the said amount to pay for other projects to boost your financial portfolio. You can also use the spare cash to invest into your retirement funds and other investment vehicles that could serve as your income substitute after you stop working. Do you want to extract cash from your equity? You can do so by applying for a home equity loan or line of credit-two options which can help you spend the money on short-term goals like a business expense, dream wedding or college tuition fees.
Choose between fixed-rate and variable-rate wisely
Your mortgage repayment strategy depends on the type of mortgage you will take. There are two major categories of mortgage deals – fixed rate and variable rate. If you want a fixed rate, make sure that you have saved enough money to pay off at least 3 months’ worth of monthly payments—in case you lose your job or when your business dwindles. If you want to know exactly how much you owe the mortgage company each month and you don’t want to worry about fluctuating interest rates – opt for the fixed rate. You can fix your mortgage from two years to ten years or longer.
Aside from thinking about how long you want to pay your mortgage, it is also important to consider how much penalty you will get in case you do the following –
- Miss payments
- Default on loans (60 days or more)
- Repay the loan early
Fixed rates usually have slightly higher interests than those on the best variable rate deal-but the risk is less compared to variable rate.
So, if you don’t want to pay for a higher monthly payment when the market fluctuates, choose a predictable monthly payment Opt for a fixed rate mortgage payable within 15 or 30 years. But, there are satisfied borrowers who opt for variable rates and don’t mind sudden interest rate fluctuations.
Regardless of your mortgage category, it is always important to make sure that you understand how your mortgage works so you can save more money and use it for other purposes.
NSW Mortgage Corp makes it easy for borrowers planning to apply for first time home loan to choose the right mortgage. Take advantage of our free, independent and online pre-assessment by making an Enquiry today!