Deciding to purchase a house is one of the biggest buying decisions that most people will ever make. But, few people actually have the cash in the bank to buy the house outright. That means the majority are going to be obtaining a home loan at some point in their life. And, when the fate of your home loan rests in the hands of the lender you need to be prepared. Here are 5 things to do in order to be approved for a home loan.
1.Check your credit score
Lenders have a long list of things they are going to look at when determining if you are a safe risk to loan money to, and your credit score is one of the biggest factors. FICO scores range from 300 to 850, and the higher you are the better your chance of obtaining a home loan. Lenders like to see that you have a score over 740. The higher it is the better your interest rate will be, which means the lower your monthly payment will be. If your score is on the lower side, FHA loans can help you with scores as low as 540.
If you need to improve your credit score get to work. Catch up on any late payments. Make all payments on time. And, work on paying down on your debt.
2.Check your credit report
If your credit score needs to be improved take a look at your credit report to see what is impacting your score. It is not uncommon for there to be errors on reports. You should look carefully at your report to see that it is accurate. If there are errors than work to quickly get them removed.
You can check your credit report for free with the three major credit bureaus every year.
3.Look at your debt-to-income ratio
Lenders are also going to look at your debt-to-income ratio. They want to see that you make a significant amount more each month than what you are paying out. To find out what your ratio is, start by adding up all your monthly income. Then, add up all of the debt payments that you make each month. Divide your total debts by your total income and you have your debt-to-income ratio. Most lenders will not lend you money if your ratio is over 43 percent.
4.Save for a down payment
Most mortgage loans are going to require that you make a down payment on the property you are buying. There are some down payment assistance programs that you could qualify for, but overall you will need to have some sort of down payment ready. The standard is 20 percent, but there are programs that will allow you to pay less. There are specific rules about where the money can come from and how long it needs to be in your bank account before it can be used, so check with your lender on the specific details for each program.
5.Determine how much you can afford
While this is not a necessary step to getting approved for a home loan it is an important step to do before meeting with a lender. A lender can pre-approve you for a home loan. They will look at all of the things mentioned about, and others such as the length of your employment, and then they will determine how much they are willing to lend you. That does not mean that you should set that number as a budget and start your home search. It’s important that you look at your lifestyle and spending habits to see how much you are comfortable paying as a mortgage payment each month.
Your lender does not know if you like to travel around the world every year, enjoy shopping, or eat out every night. That is your job to factor that into your budget and determine what you really can afford.
When you are ready to obtain a home loan meet with multiple lenders. Find an experienced lender that you can work well with. They will walk you through each step of the home loan process. But, starting with these 5 tips will get you headed in the right direction.