Buying a new home or car is exciting stuff. Whether you're going after a condo or a convertible, it's a great feeling finding what you want. The only thing better? Knowing that you're saving money on your loan because you're prepared and your credit report is in tip-top shape.
When you're considering getting a mortgage or car loan?or any type of loan, really?there are three things you should focus on before you apply. These loan factors are called the "big three" because they could save you big money if you know how to use them to your advantage.
FACTOR #1: Your credit score. The first thing you should do is check your credit score. Scores above 680 will help you qualify for standard rates. The higher your credit score, the lower your interest rate will be. Get your credit score as high as you can before you apply. Here are a couple ways you can do that:
* Order a credit report and make sure it's accurate. If there are mistakes, have them corrected by filing a dispute.
* Pay your bills on time, especially for at least 6 months before applying for a loan.
* Keep your credit card balances way below your credit limits and do not apply for any more credit.
Your credit scores can be improved if you work at it.
FACTOR #2: Debt-to-income ratio. Lenders need to be sure that you can repay your loan. So they use a calculation called your "debt-to-income ratio" to help them figure out where you stand. You can determine your debt-to-income ratio by adding up your monthly debts and dividing that amount by your monthly income. A debt-to-income ratio under 20-30% is usually considered good and will help you be seen as financially secure.
If you're not hitting the 20-30% mark, try to lower the amount of your monthly debt. Create a monthly spending plan to help you save money. You'll want to shrink your debt as much as you can before you apply for your loan. You may also be able to increase your income by co-signing with your spouse.
FACTOR #3: Loan-to-value ratio. Another thing that will affect your interest rate is the loan-to-value ratio. This ratio helps you work out how much you can afford to borrow (at the best rates). All you do is divide the loan amount by the property's value. If your loan-to-value ratio is above 80%, your rates could jump up quite a bit. So the trick here is to make sure your loan-to-value ratio is below 80%. You can do that by finding a less expensive home (or car) or saving for a bigger down payment.
Keep these big three factors in mind as you prepare for a loan, and you can enjoy BIG savings on your new home or car.
