Purchasing a home is one of the most significant events in the lives of individuals and families. But, acquiring an approval for the mortgage loan may seem quite a daunting task especially to first time homeowners. Below is a checklist to assist you in knowing what lenders focus on when approving a mortgage.
Your Credit Score
First of all, a lender will examine your credit history, which implies your credit score level. This three-digit number provides the lender with information on how well you have been repaying your loans in the past. All in all, the higher your credit score, the more likely you are to be approved when applying for a mortgage with a comparatively low interest rate. The good and acceptable credit score is 740 and above and that means one should easily secure approval. However, the numbers ranging from 620 to 739 are also considered as good and still, you may be charged a higher interest rate. If the credit score is below 620, then it will be much more challenging to get approved. If your credit score is not very good, make all your payment on time, pay off your balances on any credit card and other loans and refrain from applying for new credit until after applying for the mortgage. This can help increase your score.
Your Debt-to-Income Ratio
This is so because the lenders want to be certain that your income would comfortably enable you to pay for the monthly installments for the mortgage. To determine your debt to income DTI ratio, they sum the monthly obligations such as the future mortgage payment with your total income before taxes are taken out. Typically, conventional loans allow for a DTI of 43 or less. This ratio shows that the lower your DTI, the more comfortable a lender will be with your capacity to meet the payments. One way of reducing the DTI is by paying off debts because every reduction in the debt amount will help in reducing the DTI.
Your Down Payment Amount
The down payment is the initial contribution that a buyer brings to the table for the purchase of the home without getting a loan. Banks would like to see big down payments, at least 20 percent of the price of the house. If you are down less than 20%, you will typically have to purchase private mortgage insurance. Ideally, you should be putting down as much cash as possible; the more you put down, the less you have to finance. This demonstrates financial capability in paying for a mortgage and it gives a homeowner equity in the home at once. There are many programs available to help first-time buyers find funds for a down payment if they are unable to make the required amount on their own.
Your Income History
It is still possible that lenders will require applicants to provide the documents proving income for the last couple of years at least. If there were any gaps in employment or if the individual frequently switched jobs, it could become more difficult to acquire. Explaining employment gaps should one had can be helpful if the causes were reasonable. To show that your income is steady, always have your prior W2s and present pay stubs handy. If you are a freelancer or if you have other sources of income besides a regular job, get ready to present documents confirming that income too.
Your Existing Assets
Besides the income that a person has coming in the door, the lenders are interested in his or her assets cash reserves, investments, etc. , meaning you need to have a very good financial backing. Be prepared to provide recent bank statements to your lender. The more the assets the more confident they can be that you could manage other financial challenges that come your way without defaulting on mortgage payments.
Your Intended Use for the Home
Lenders also pay particular attention to the purpose of the home to be financed as a primary residence, a second home or an investment property. Normally, approval for a mortgage is at its highest if it is a home mortgage for a dwelling that you intend to occupy. There is usually an inherent risk involved in funding vacation homes or rental properties hence the larger down payment and interest rate.
Getting Prequalified
First things first: talk to a lender and get a prequalification letter before you even begin house hunting. They will lightly pull your credit and ask you about your financial background to give you the loan amount they think you are capable of repaying. This is because when you are submitting an offer to buy a house, a prequalification letter proves to the sellers that you are capable of securing financing, thus making your offer more competitive as compared to other buyers who are yet to be prequalified.
Improving Your Chances
If your status now stands below the expectations of the lenders in terms of security, then you are not doomed. It may just be the case that you need to spend some time working on your profile. However, to improve your credit score and to reduce existing credit, it is advisable to save a higher down payment. A shorter loan period from 30 to 15 years also improves your debt-to-income scenario. Mortgage approval is well facilitated by demonstrating good money management practices.
Consider Federal Backed Loans
Federal Housing Administration FHA loans are helpful to the buyers with some kinds of issues that may not be fitting to the traditional conventional loan requirements. These loans are actually insured by the federal government and therefore there is more leeway when it comes to issues such as credit score and down payment. Low to moderate income buyers can also get loans backed by Fannie Mae and Freddie Mac that could be less expensive.
Shop Multiple Lenders
Every lender has their own requirements, but some are more forgiving than others. It is preferred because it increases your chances of securing a mortgage than being turned down flat. It is advisable to make first appointments with lenders in big banks, local, credit unions, and online lending firms. Look at what each lender pre-qualifies you for. Take the loan that you are most comfortable with.
Lean on Your Realtor
A professional real estate salesperson is well equipped to help when searching for a home for purchase. Buyers are aware of time and documents, they understand fluxes and contracts much better than an average buyer. Be open with your financial details to your real estate agent. They can assist you in defining the range of interest rates you can qualify for and the lenders you should apply to, which may offer better mortgage rates for you. When an agent is involved in the process, it is not very cumbersome to obtain mortgage approval.
Getting a home is still possible for many people if they would only try and improve their standings in the financial market. Thus, the approval process may seem quite daunting, but being ready and knowing what to expect is half the battle in most cases. Get prepared to present a lot of proofs of your financial situation and reliability during the application process. Just keep on trying and do not lose hope because there is still a mortgage that will allow you to own your own home.
