Prospective homeowners face a daunting task when preparing their finances for a home mortgage. Due to bad credit, a lack of cash on hand, or a seller’s market, many homeowners fear that mortgages in Maryland are out of their reach. However, proper financial management can help you find the mortgage loan that meets your needs.
This article aims to help prospective homeowners prepare their finances for home mortgages in Maryland. These tips can help you examine your financial situation, the same as a mortgage lender, to improve your eligibility and successfully prepare for the burdens of home ownership.
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Take a Financial Snapshot
Mortgage lenders consider certain factors when deciding your eligibility for home mortgages in Maryland. We advise prospective homeowners to look at their finances as a lender would. Be prepared to discuss or provide documentation for the following:
- A steady income from the last year
- Cash available for down payments, taxes, and closing costs
- Recent investment activity
- FICO credit scores and history
- Stocks, real estate, and other assets
- Past tax returns
- Employment history
- Debt amounts
- Rental history
Although assembling this information won’t automatically fix your finances, it will help you see them as a snapshot, revealing the areas that need improvement.
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Look Deeper Into Your Credit Reports
Credit reports are more than a credit score. Mortgage lenders look deeper into your FICO reports to learn more about your financial history and current situation. If you plan to apply for mortgages in Maryland, you should, too.
For example, lenders look at the credit utilization ratio to determine how much debt the account accumulates. To them, the most attractive borrowers are those who spend less than 30% of their available credit since they successfully pay down their debts and borrow less than they spend.
One way to make your credit account more attractive is to mix different types of credit since balancing a mix of accounts helps to diversify spending and improve your credit usage ratio. However, opening new accounts leads to credit inquiries, which can temporarily dent your FICO score.
The most substantial credit accounts balance account type and number to maximize their usage ratio. Additionally, people who pay their bills on time will always be more attractive to lenders than those who borrow more. Think of your credit report as your prospective lender will, as a profile of your financial trustworthiness.
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Manage Your Debt-to-Income Ratio
Similarly to their credit analysis, mortgage lenders look at their prospective borrower’s debt-to-income ratio to gauge their financial health. Debt-to-income or DTI refers to how much debt you have, measured as a percentage of your current pre-tax income.
In other words, your DTI tells lenders how easily you can pay off your mortgage on time. It includes the cost of all loan payments, including personal, credit, and student loans. It would add to the financial burden of the new mortgage if you were to be approved. This includes:
- Mortgage principal
- Taxes
- Interest
- Insurance
Once the current and proposed debts are tallied, the DTI is calculated by dividing that number by the borrower’s pre-tax income. The ratio, expressed as a percentage, should be 43% or less to qualify for a mortgage, according to regulatory guidelines.
Despite these guidelines, mortgage lenders can approve loans for people with higher DTIs in certain circumstances. These usually involve high cash reserves not reflected in the borrower’s earnings, such as a recent inheritance.
Reduce debt without taking out new loans to improve your DTI. Every account you can close brings your financial standing closer to mortgage eligibility.
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Increase Your Savings
Savings are essential in mortgage eligibility because they determine how big your down payment can be. Most mortgage lenders in Maryland even require prospective borrowers to buy private mortgage insurance (PMI) plans if they can’t pay at least 20% of the purchase price as a down payment.
A 20% downpayment of the purchase price is necessary to avoid PMI at no extra cost. Though if you put 5, 10, or 15% down, there are still ways to avoid monthly mortgage insurance. These could carry an additional cost. Ultimately, a small down payment could cost you thousands over many years (mortgage loans are usually 30-year contracts).
Prepare your finances for home ownership by increasing your savings until you have a big enough downpayment to avoid buying a PMI policy.
Prepare for Home Ownership With a Woodsboro Bank Savings Account
At Woodsboro Bank, we know that financial preparation can be complex. In a market that favors lenders over borrowers, we help our clients manage their situation to increase their eligibility for home ownership. With the right credit advice and financial prep, mortgages in Maryland don’t have to be out of your reach. Contact Woodsboro Bank today to learn how our savings and credit programs can help you customize your finances for home ownership in Maryland.