Know what you can afford.
Most loan institutions require the mortgage payment not to exceed 30% of your gross income. Look carefully at what qualifying earnings of yours can be substantiated with bank balances, pay stubs, and financial statements if you are self-employed. Compute the loan principal that 30% of your combined monthly family income will carry, at prevailing interest rates. Divide the loan balance (or mortgage amount) by 80% – 90%. The resulting figure will approximate the sale price of the home you will buy with a 10% to 20% down payment. The difference between this figure and the loan balance equals the size of the down payment needed. If you have a down payment – this is the price range of homes you should be looking at.
Know your credit rating and all its ‘dings’.
Check your credit rating for errors and “negatives” before applying. This takes the time to correct and, where negative items exist (“dings”), you can often attach a letter of explanation with the loan package that will reduce the negative impact of the derogatory item on the loan application outcome.
Keep your debt and monthly payments as low as possible prior to applying.
Along with your income and credit history, the underwriters are going to evaluate the total debt load you must service. The higher your outstanding debt and greater your aggregate current monthly debt payments are, the less chance you have of receiving the loan you want.
Remember the “cost of owning” a home when planning your household budget.
Along with the mortgage payment, a home has property taxes, several types of homeowners insurance, maintenance and repairs as part of the total cost equation. Plan these mortgage loan factors into your budget when considering a price range for your new home and new home loan.
Shop your loan before you make an offer.
Find a loan agent or loan broker you feel comfortable with. Spend time with this agent explaining your financial situation and what kind of home and area you are hoping to own in. Your loan can be largely pre-approved, subject to certain conditions (LTV, personal income to debt ratio, etc.) before you make an offer. Although it doesn’t happen often, sometimes if the seller knows that you are preapproved and the preapproval amount is for a certain sum – this can be used as leverage to lower an impatient seller’s price down into your targeted home price range.