5 Steps to Help You Get Approved for a Home Loan
When it’s time to buy a home one of the most stressful parts of the whole process can be in trying to secure a loan. Depending on where you live, the average home can cost anywhere from the mid-six figures to well over a million dollars. Since most of us don’t have that kind of money on hand, the very concept of applying for a loan to cover such a major expense can be overwhelming. Fortunately, there are some things you can do to help move toward your goal of getting approved for that loan and securing the house of your dreams.
Let’s take a look at the steps you’ll need to take to get approved for a home loan.
Check Your Credit
You’ll want to take a look at your credit score and credit history before you apply for a mortgage. The importance of your credit score is probably somewhat obvious — the higher the score, the better off you are. Your credit history is important as well. You’ll want to check your credit report to see if there are any errors or potential problems. If you have a history of late payments, an outstanding bill, or something that’s gone into collections, it could adversely affect your chances of getting the home loan you’re looking for.
If your credit score is too low, you may need someone to co-sign the loan with you. That may not be a problem for couples, but if you’re trying to do this on your own it could definitely set you back.
An alternative to finding a co-signer would be to improve your credit score before you apply for a mortgage. Your payment history makes up about 35% of your total credit score. The total debt you owe in relation to how much credit has been extended to you makes up about 30%. That means you want to keep your debt low and make sure you’re paying your bills on time. Avoid any big purchases on credit leading up to applying for a loan, and don’t take out any new lines of credit before applying for a mortgage.
Determine Your Income
You should have a solid understanding of your income before applying for a home loan. This will help you establish your debt to income ratio. That’s the total amount of your gross monthly income compared to how much you pay out in debts every month. If you have a high debt to income ratio you’ll likely have a hard time getting a home loan.
Your lender is likely going to want at least your last two pay stubs to verify your income. If you’re self-employed, you may need to provide your previous year or two’s tax returns to demonstrate that you have income stability.
The more debt you have, the smaller the mortgage you’re likely to be approved for. Do your best to pay down any debts you have before you start looking for a home loan and you’ll likely have much better results.
Determine Your Budget
This may be one of the hardest parts of getting the home loan that’s right for you. You need to get an idea of what is going to be within your budget. This isn’t the same as knowing what your income is, because you’re not just determining how much money you can afford to spend each month — you’re looking at the bigger picture which includes all the other expenses you may have. This means things like your regular bills for your utilities or your car, as well as money you want to be saving for a rainy day or for vacations or for just eating out on the weekend.
The standard many people go by is aiming for total housing costs of no more than 35% of gross income. If you can get to a lower percentage that’s even better. Keep in mind that this isn’t just your mortgage payment we’re talking about, this 35% should also include any taxes and insurance costs associated with your home.
Determine Your Down Payment
A down payment is often one of the hardest parts for many first-time home buyers to manage. You can expect to need to save at least 10% for a down payment and in some cases, you may be required to pay more. It’s not outside the realm of possibility that you may be required to put up 15% or 20% as a down payment.
If you’re getting an FHA loan, your down payment may be much smaller, but you’ll also be required to carry mortgage insurance. All things being equal, the more you can put towards a down payment the better off you’ll be in the long run. That’ll mean a smaller loan you’re paying back and in turn less interest you’ll have to pay as well. If you can manage a 15% or 20% down payment, then you should absolutely do so.
Determine Your Mortgage Type
There’s more than just one type of mortgage loan — there are actually several types. Some are backed by private financial institutions, like banks or credit unions, while others are backed by the government. There are different qualifications for each, so you’ll need to know which kind best suits your needs.
Conventional Mortgage: As the name suggests, this is the standard type of home loan. This is the kind of loan you’ll get when you head to your bank or a private lender. You likely need a sizeable down payment (10% to 20%) to qualify for one of these as well as a solid credit rating.
FHA Loan: FHA stands for Federal Housing Administration. This type of loan is backed by the government and if you qualify, you may only need a down payment of 3.5%. This is the sort of loan you might aim for if you don’t have a lot of savings or you don’t have the best credit. Although this can afford you the opportunity to get a home loan, you’ll also to have to pay for a PMI which stands for private mortgage insurance. That is meant to offset some of the risk for the lender.
VA Loan: If you are a veteran you may qualify for a loan from the Department of Veterans Affairs. Depending on your qualifications you may be able to get one of these without having to put a down payment on a home at all.
USDA Loan: If you’re looking to get a house that’s not in the city, such as farmland or some other rural type of area, you may qualify for a USDA loan. Similar to other government backed loans, there are several qualifications you and the property you’re looking to purchase will need to meet.
Jumbo Mortgage: Jumbo mortgages are used when a conventional mortgage simply won’t cover the amount needed. That means the property is expensive enough that it exceeds the maximum amount for a conventional loan. To qualify for a jumbo loan, you’ll need to meet a number of requirements related to your credit and other conditions which are stricter than with a conventional loan.
The Bottom Line
Trying to get a home loan can be rather anxiety-inducing and intimidating. It doesn’t have to be that way though.
Planning ahead is always the best way to secure a mortgage that will allow you to get the home you want. Your credit and your income are the two key components that you need to focus on to get the home loan that’s right for you. Do what you can to give yourself the best credit rating possible. Then, work with what you know about your income to stay within your means and get a loan that is suitable and manageable for you and your family.
Have all the information you need ahead of time and make sure you’ve done your research. That way you won’t be surprised, and you’ll be able to deal with the bank or lender you choose from a position of knowledge and power.