Buying a home is one of the biggest and most important financial transactions you’ll ever make, but not everyone can qualify for a mortgage.
If you’re in the market for a new abode, it’s important that you know exactly how to qualify for a home loan. When you get pre-approved, you’re on the right track toward acquiring the home of your dreams.
Check out these seven helpful tips that’ll get you from walking down the pathway of doubt to dancing along the road of home ownership in no time.
1. Be Credit Score-Aware
When it comes to learning how to qualify for a home loan, your credit score is probably the most important step. Before you even fill out approval paperwork, you should know what your FICO score is so you can be better prepared.
Most credit score reporting companies use the same factors to determine what your credit score is. These factors include:
- How long you’ve had credit established
- If you pay your payments on time, every time
- How much available credit you have vs. how much you are in debt
- If you’ve had any “hard inquiries” on your credit report, meaning if you’ve asked a company to pull the report so you can obtain more credit
While credit scores vary wildly, the average mortgage company expects people to carry a FICO score of approximately 680 or higher. If your current score is low, it’s time to take steps to improve it, as there are not too many options for bad credit loans when it comes to buying a house.
A few ways you can improve your credit score is to stop spending and start paying down those credit cards. Look for lower interest rates and balance transfers so you can reduce your total debt and monthly payments.
Get a free copy of your credit report and look for any possible errors. You can correct most errors with a letter or a phone call. When in doubt, talk to a credit counselor; many companies offer these services for free.
By paying down your debt and watching your FICO score go up, you’re proving to the bank and to yourself that you’re a responsible consumer. Get your score in order before you apply for any form of a mortgage.
2. Save Money for a Down Payment
There are some mortgage programs that allow people to buy a home without a down payment. Most lenders expect at least a minimum of 3.5% of the total purchase price to secure the property, though.
Some sellers will offer to pay for closing, but others expect the buyer to foot the bill. With this information in mind, you should begin saving your money as soon as possible so you’ll have the cash to shell out for a down payment.
Put your money in a high-yield savings account to help it grow faster as you prepare for homeownership. You’re also going to need to dole out cash for other things like a home inspection, title search, and appraisal.
Talk to your lender or mortgage broker to find out which programs you may qualify for and how much the down payment will be in advance. The more you know ahead of time, the better prepared you’ll be when it comes to saving your money.
If you can’t pay a 20% down payment, you should be aware that you’ll also need PMI or private mortgage insurance. This monthly fee gets added onto your total mortgage payment every month until the balance of the loan reaches 80% paid.
3. Hold Tight on Spending
While you’re waiting to buy a home, you might be thinking of getting other things like new appliances and other big-ticket items. But spending too much, too soon is a red flag for mortgage lenders.
If you’ve had your eye on that shiny new car, it’s definitely best to hold off until you have closed on the home. Large purchases that rely on credit are huge in the eyes of lenders and it can cost you the deal in the long run.
Make sure you can hold tight until you’ve closed on a home, otherwise, you could end up dealing with serious problems at the closing table. There have been many cases where people wanted to buy a home and assumed they had finished the deal, so they made a large purchase. On closing day, that purchase shows up in their records and the bank pulls out from the deal.
Do whatever you can to avoid making large purchases before closing day. Remember that as soon as you close, you’re able to run out to the dealership and get that new car or head to the home improvement store for that shiny new fridge.
4. Learn How to Qualify for a Home Loan
Like everything else in life, education is key when it comes to being successful with a new home purchase. Talk to a mortgage broker who can walk you through the process of the loan application.
The more you know ahead of time, the better armed you’ll be to make sound financial decisions. It’s also important that you get pre-qualified before you proceed.
The pre-qualification process gives realtors a “snapshot” of your current situation and should give you a number as far as how much home you can afford. When you get pre-qualified, it will not affect your credit. You’ll have to answer a few simple questions such as your annual or monthly income, current debt, and estimated credit score.
You should receive a printed pre-qualification letter that you can take with you when looking at homes. This letter will demonstrate your honest intention to buy a home and it gives the seller confidence that you’re able to get the deal done.
5. Keep Your Emotions in Check
House hunting can be emotionally exhausting. It’s important to try and keep your emotions in check when you’re looking for a home and remember that even if you had your heart set on the first one you see, there are plenty other homes available.
Too often, buyers get caught up in the fantasy of a particular house only to feel let down when another buyer swoops in. Fortunately, there are ways to combat this emotional roller coaster.
Before you start your search, write down a list of the things you must have, the things you’d like to have, and the things you definitely know you don’t want. Then, stick to that list when viewing homes. This is a wise way to eliminate the homes you know you won’t want to buy while keeping your eyes on the prize.
Having the dollar figure of how much house you can afford in advance is also a good way to keep yourself grounded. By only looking at homes you know you can pay for, you’ll be able to narrow your vision and stick to a specific goal and plan.
6. Have Your Paperwork in Order
When you apply for a home loan, the bank is going to need to see a wide range of documentation to assure that you’re qualified, just as is needed to apply for a personal loan. Have all your information ready to go to make the application process run smoothly.
Some examples of things you’ll need to have ready include:
- Your most recent paystubs (usually at least a month or two’s worth)
- W-2 or 1099 forms for the last 2-3 years
- If you’re getting a gift from someone for your downpayment, the bank will need a letter written and signed by the gifter
- Bank statements showing your current balance, and an explanation of any large deposits or purchases
- A copy of your credit report and/or credit score
Get all the necessary paperwork ready to go so you can provide this to your lender all at one time. This will keep you on track for both the approval process and the day of closing.
7. Comparison Shop
Remember that there are plenty of different mortgages available to fit your lifestyle and budget. Talking to a mortgage broker can help you find the right loan for your needs.
Compare rates, down payment requirements, and loan terms side-by-side to help you figure out which mortgage will suit you best. By doing your shopping homework, you can find the best deal that will save you money.
And, keep in mind that even if you can afford a $200,000 home, if you find one for less, it’ll definitely save you cash every month that you can spend somewhere else. You don’t want to end up “house poor” where all your money is going into the home and you have nothing left to enjoy life.
Ask friends or family members for recommendations on a lender and mortgage broker that they trust. Word of mouth is a wonderful way to ensure you find a representative who will have your best interests at heart.
Preparation is Key
As you’re learning how to qualify for a home loan, you’ll learn a lot along the way. Being prepared is the key to success, and you will be able to shop for the home of your dreams in total confidence.
For more information about personal finance, loan terms, and more, be sure to visit our website.
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