In a previous article, we talked about how you need to start working on your mortgage pre-qualification early if you are self-employed, have a low-income job or simply have bad credit. Now we will talk about specific strategies and tips that can actually help you improve your chances of qualifying for a favourable bank loan as a first time homebuyer.
1. Improve your credit rating
Lending institutions all look at your credit rating to determine how well you manage your debts. Those with better ratings can secure loans easily and at better rates. Those who have a poor rating run the risk of not qualifying for a loan and even if they do qualify, they might get the loans at unfavourable terms owing to the fact that they are high-risk customers.
Before you even think about applying for a mortgage, you need to know your credit rating. There are bureaus charged with keeping these scores. Ask for your credit report and go through it to see if there are any mistakes that could be lowering your rating. Correct any mistakes found and ask for advice on how you can raise your rating. Typically, you can raise your rating within a year by:
- Slowly paying off your already existing loans
- Paying off your credit cards and not running them up to the limit
- Not applying for any more credit cards
- Keeping your utilisation below 30% (Your credit utilisation refers to the amount of money you borrow in relation to your limit. For example, if you can borrow up to a limit of £1,000, experts say that you should only ever owe up to £300 at any given time – below 30%)
- Do not close old credit accounts (the longer your credit history, the safer you seem)
- Review your credit report at least once every year to ensure that it is correct
2. Find ways to increase your income
How much you earn determines how comfortably you can pay back a loan. Most people think that they should only report employment income. There are institutions that actually look at the whole picture. This means that you should keep great records of all income. From your business to your side jobs and even your spouse’s income. The more money available to you and under your control, the more likely you are to qualify for a loan.
3. Manage your monthly payment obligations well
We all have mandatory monthly payment obligations. From things such as rent (probably why you want to buy a house in the first place) to utility bills, entertainment money and so on. It all comes down to how much extra money you have after all these obligations have been met. If you have an income of £5,000 a month but have monthly payment obligations of up £4,980, then you clearly do not qualify for any more loans. Find ways to limit your monthly payment obligations and manage them well. One of the best ways would be to cut off unnecessary spending. You can very easily reduce the amount of money you spend on entertainment and trips.
4. Find a way to increase your net worth
Bankers often look at how capable you are to give them their money back. This often includes looking at your net worth. If they can recoup their money by selling your assets should push comes to shove, then you are more likely to qualify for a loan. Find ways to increase your net worth and you will be able to get a mortgage in time.
It is all about good financial management and showing the institutions that you have taken necessary steps to make yourself less of a risk to their business. Before you even think about applying for a loan, make sure that all these things are in order. Sometimes, you can enlist the help of a financial adviser who will assess your current situation and chart the most practical path towards increasing your chances of qualifying for a loan.
Alternatives To Banks
Granted, these tips are measures to increase your chances of getting approved. However, there will always be that odd circumstance where banks refuse to loan money. These can happen whenever there’s a sudden downturn and a lot of uncertainty in the market. In times like these, only the people with a credit rating close to perfect end up getting approved.
If you find yourself in a situation where getting approved is difficult, you can still look for alternative forms of financing such as the use of flexible payment terms. Investors like Simon Zutshi, Reena Malra and Rick Otton discuss a lot about these forms of transactions. While many prefer a more traditional route to house buying, it’s still good to be aware of alternative methods if bank financing runs dry.