Ready to buy a new home? For most homebuyers, you can’t buy without financing the purchase. And getting the right mortgage may seem a bit overwhelming. Where do you start?
Before you start house hunting and submit an offer for a property, take some time to improve your chances of qualifying for the loan. With these tips, you’ll look better to a lender and feel more confident in your purchase. You’ll love your new home even more.
Start with a check-up
A credit check-up, that is. Lenders pull a credit report as the first step in the application process. That’s a good place to start. Luckily, you are entitled to a free credit report through each of the three major consumer reporting companies: Experian, Equifax, and TransUnion. It’s worth pulling all three because they can vary in their reporting practices. Spend time going through each, ensuring they’re as accurate as possible.
Take steps to get your finances in order
Your credit report is a good indicator of your financial strength and a good way to let potential lenders know you’re responsible with your finances. If you find inaccuracies, follow the credit reporting company’s guidelines for disputing the problems. If your debt-to-credit ratio is too high, you can work to pay the debt off. Watch your credit score over time. If you notice fraudulent behavior, it could be identity theft. Work to clear these off your record as quickly as possible.
Work out your financial plan
It’s easy to fall in love with a house, especially when it’s in the right neighborhood or has the gourmet kitchen you’ve been dreaming of. However, stretching your budget to make the numbers work might not be in your best interest. You don’t need to invest in a financial planner to do a little planning on your own.
Experts suggest that housing costs should be around 25 percent of your take-home pay. If you’re looking for a loan that requires a 20 percent down payment, that’s a number you can calculate. Do the math and see how closely your numbers match. A potential lender will calculate it also; thus, you’ll avoid the surprise if you figure it out first.
What lenders look for
While lenders start by pulling a credit report, they’ll ask for a few more pieces of information in order to approve you for a loan. They need:
- Proof of income – W-2 wage statements and tax returns from the past two years. Any additional support, such as proof of alimony, bonuses, or other business income.
- Proof of assets – bank accounts or investment accounts you’ll use for down payments or closing costs.
- Good credit scores – lenders look for FICO scores above 620 for conventional loans or 580 for FHA.
- Employment verification – lenders want to ensure you’re in a stable, financial position so you can continue to pay your loan. Self-employed will need additional proof to verify a healthy business.
When you know how lenders operate, there are fewer surprises during the process. Get prepared early, and you can fix any potential problems before they stop your loan process in its tracks.
Larger down payments improve your options
Knowing your numbers can help you make wiser choices. Be realistic with your budget and how much you truly can afford. This will allow you to save more and have more to put toward the purchase price. Lenders will reward you with better terms and interest rates. This can lower your monthly payment, and help you pay off your loan sooner, which can also help you build more equity.
Target your approach to get pre-qualified
When you’re ready to fill out an application, spend time reviewing lender options. Most lenders take a targeted approach toward potential clients; you should follow their lead. Look for a company that offers you what you’re looking for. If you specifically want an FHA loan, ensure they are well-versed in FHA requirements.
It’s okay to speak with several lenders at the beginning. Just be sure they ping your credit history within a short timeframe. When different companies pull your credit history over several weeks, it may lower your credit score. Pre-qualification is lender assurance that you look good for this specific loan. It’s not a guarantee, as they will need to reverify before the contract is signed.
Bottom line
For most of us, buying a home and loan approval go hand in hand. You can’t have one without the other. If you’re looking to buy a new home, spend time now to ensure you qualify.
Getting your financial house in order before you apply will ensure you have a smoother ride through the process and give you better financial skills for life.