After years of economic recession all resulting from the mortgage crisis of 2008, it’s actually very easy to apply for a mortgage in 2022. It’s just that actually getting a good mortgage can be difficult. This is because you need to have the right financial history already on your side and then need to find the best mortgage provider out there to ensure that you get the best rates possible. You also need to go about it the right way so as to be able to negotiate a good mortgage.
The difficulty begins right at the very start with actually having a good enough credit history to qualify for even a steep mortgage, let alone one that will actually be worth your while. Here’s what you need to know.
Can I qualify for a mortgage?
A mortgage is a huge financial commitment that will span literal decades of your life. The most common mortgage term is a whopping 30 years, which means that you need to commit to paying every single month for three decades. Banks and other mortgage providers will therefore not offer a mortgage to someone they believe will not be able to pay.
The unfortunate reality is that there is no clear way to tell if someone will be able to pay a mortgage, no matter how good or bad their credit score is at the time of applying for the mortgage. No one can predict the future, especially in today’s world. Still, even if things change drastically in your future, mortgage providers do look to your past to get an idea of how you’ve managed your money so far. Above all else, they use your credit score as the main factor in deciding whether to offer you a mortgage.
This is far from being an accurate way of predicting future behavior, to be sure, but it’s the only way to have some inkling about your history with money and what it might mean future. Even still, many people with bad credit scores are simply victims of circumstances that were beyond their control and they may well pick up significantly in the future. They may never again be in a position to miss a payment or get into debt ever again. However, to prove this they will need to steadily build their credit score.
According to KnowBetterPlanBetter, If your credit score is below 580, you will struggle to qualify for a mortgage. Also important to note, you should check your credit score before you start applying, as your credit score may actually go down due to hard credit checks carried out by the mortgage providers – which puts you in an even worse position that when you started!
Apply to multiple lenders
Since there is no objective way of assessing your financial nous, different mortgage providers will offer different annual percentage rates (APRs). However, you will not know what they are going to offer until you actually apply. In order to avoid having to accept the first quote they give you, it’s always a good idea to do your homework and then apply to multiple lenders.
You shouldn’t apply to too many lenders, though, as too many credit checks can negatively affect your credit score. The magic number is generally considered to be 3 lenders that will allow you to get the best deal possible without completely wrecking your credit score. Find the best lenders, approach them and then each will come back with a quote. If one lender is cheaper than the others, use their quote to negotiate with the others. They may be willing to go lower in order to secure your business. Unless there is a compelling reason to keep your interest rate high, they benefit more from having you on their books.
You should also have a good idea of the current US mortgage rates when comparing quotes to ensure that the lenders you approach are keeping within the average nationwide interest rates. At present, for example, the average APR for a 30-year mortgage is 4.42%. Unfortunately, what with with world events being what they currently are, this is the highest it has been since 2019. Mortgage rates hit record lows in 2020 and 2021 as the general interest rate was lowered to stimulate economic recovery. This was one factor that led to the high cost of housing today.
The reality is that mortgage rates are likely to only go up from here. For this reason, it is imperative that you negotiate the lowest rates possible.
You may think it best to wait until you’ve found the perfect home before applying for a mortgage. However, this is not the route you should take. On the contrary, getting pre-approved for a mortgage is far more beneficial.
When you get pre-approval, you know exactly how much you can spend on a new home. You won’t waste your time looking at properties that you cannot afford. Then, when you do make an offer on a property, the realtor will take you seriously, knowing that you can pay for the home without any trouble. Offers on properties that are not backed by pre-approval are often disregarded. By the time you get approved, your dream house may have been purchased by someone else.
How to qualify in future
If you do not qualify for a mortgage due to a poor credit score, you should begin taking steps to improve that score. This can be done in a number of ways. Ideally, you should pay off all current debts. Then, by applying for secured credit cards, you can gradually improve your credit rating.
In the meantime, you must be particularly careful not to be late on any rent payments, as that can negatively impact your chance of getting a mortgage. It is also important that you don’t overspend on your credit card or get into unnecessary debt.
It will take time to build up your credit score, but gradually you will get to a place where you are able to qualify for a mortgage with a reasonable APR.