How Do I Get a Home Loan
Applying for a home loan is a process that many people find challenging to navigate, but it doesn’t have to be. If one is willing to take some time and understand what the lenders need, one can easily do the home loan application. Below is a breakdown of the various procedures that are involved in the qualification of a mortgage loan.
Check Your Credit Score The first thing that a consumer should do is to review credit reports from the three credit bureaus, namely Experian, Equifax, and TransUnion. Banks and other creditors will take into consideration your credit report and credit score they will use to determine your credit worth. Hence, a higher score implies that you are of low credit risk and hence you are likely to pay back the loan. The minimum credit score required should be 620, however, to get the best rates, the score should be above 700. If necessary, one should work on getting a better credit rating before applying for a loan.
Manage Your Debt Banks will assess your liabilities to check whether you are overburdened with debt. It is recommended to maintain low credit card utilization and pay off loans and other debt. Basically, the total monthly payments for all debts including the future mortgage should not exceed 36% of gross income per month. This is because in addition to coming up with mortgage payments, one might still need to clear other debts such as auto loans or student loans.
Build Up Money for a Down Payment Of all the requirements to qualify for a mortgage, the most challenging one is saving for the down payment for which one has to set aside between 10 and 20 percent of the price of the house. Fannie Mae or Freddie Mac conventional loans present the possibility of down payments as low as 3 percent. There are many low down payment programs such as FHA loans which requires only 3. 5 percent of down payment. The more you are able to put down, the better. It is also advisable to have cash of at least 20 percent for a down payment to avoid being forced to pay for private mortgage insurance.
Make a Stable Income Record Lenders need to be sure that you have a steady income to afford your payments towards the mortgage. Include copies of recent pay stubs and tax returns as proof of employment. It is desirable to have two years of continuous work in the same occupation or field of activity. Intermediary periods between two jobs can therefore justify the circumstances to a reasonable extent. If you have switched jobs often or are a freelance worker, more proofs of income may be required to prove your income history.
Maintain Existing Credit Lines It’s always prudent to use money to pay off credit card balances, however, lenders like to see three to five active credit cards with timely payments. This proves that you are capable of handling multiple types of credit accounts appropriately. This is because closing those credit cards which you are no longer using reduces the amount of credit available to you and therefore your credit utilization ratio is affected. Do not close credit line that you have held for long and use credit cards as little as possible.
Use Credit Wisely Every time you apply for credit, you receive a hard inquiry on your credit report. Lenders react negatively to a large number of hard inquiries made within a short period. They understand that consumers tend to open several new credit accounts during the time they consider purchasing a home. Avoid applying for new accounts in the months leading up to your home loan application. New inquiries from shopping auto, life, or homeowners insurance can trigger questions.
Select the Appropriate Loan Program It is important to research various loan programs offered by banks, credit unions, and mortgage companies before applying. Learn the requirements for the basic, non-conventional, USDA, FHA and VA home loans. Depending on your individual situation, your lender will be able to help you understand the loans which might be available to you. Lender approval before making an offer also enhances the buyer’s bargaining power.
Gather Necessary Documentation Apart from income and tax documents, mortgage lenders need several other documents. To be ready with documents such as bank statements, investment reports, divorce documents, child support documents among other documents. If you have circumstances like recent bankruptcy or foreclosure, provide paperwork upfront. Borrowers who are self-employed will require additional documents concerning their business. You should also ask your lender for the list of documents required so that you can complete the application form to the best of your ability.
Improve Your Debt-to-Income Ratio One of the things that lenders consider is the total of your outstanding obligations compared to your income. This entails the calculation of the total amount of your monthly obligations against your gross monthly earnings. Many standard mortgages demand your DTI to be below 36 percent. Therefore, the higher your CL/CD ratio, the more difficult it becomes to fit the criteria set by the lending institutions. Avoiding high-interest accounts and not applying for several new accounts will increase your likelihood.
Include All Income Sources List all sources of income from your job, pensions, social security, investments and other assets. Some income such as bonuses, overtime or commissions may need further documentation to consider. This is because VA loans enable the veteran to apply his/her GI Bill housing allowance. Also, the income of the spouse or partner will also help qualify for the loan if your partner will be on the loan.
To ensure you get the best chance of approval with a good credit rate, you should start working on your credit long before you apply for a credit card. You should allow at least six months or more before applying to rectify habits that affect approvals regarding money. Ability to pay all debts; Failure to pay all the bills on time. Minimize credit card balances. Avoid buying cars, furniture, and other items that will need financing before you obtain your loan. It saves you from surprises when a lender reviews your situation first. The better your credentials appear on paper, the higher your chances of securing the lowest possible interest rates.
By following these points and understanding requirements of the lender, one can be sure about his/her financial eligibility for a mortgage loan. Consult a reliable lender and a real estate agent to know more about what documents you will require. Maintain order all through the application process. Better to ask all possible questions at the beginning so that you understand what answers are expected for qualification. In case you find it hard when you are going through this process, do not shy from voicing yourself in order to receive assistance needed to own a house.
