Borrowers are rightfully a little nervous when they apply for a mortgage. But with the right preparation, qualifying for a home loan can be a rewarding experience in your journey toward homeownership.
The back-to-basics approach by lenders means that borrowers can take steps that increase their chances of a mortgage approval.
Improving your credit, reducing your debt and gathering your documentation are among the many things you can do long before a loan application to increase the likelihood of getting a “yes” from a lender. If you are a FSBO make sure you ask the right questions from a potential buyer.
1. Maintain a high credit score. The average FICO score for an approved borrower is around 720 for a conventional loan and close to 700 for an FHA-insured loan. Borrowers should find out their FICO score before applying for a loan, make sure their credit report is correct and take steps to improve their score if necessary. a great place to start is myfreecreditreport.com
Keep a vigilant eye on your credit profile while you wait for your loan to close, too.
Once the application process has begun, borrowers shouldn’t do anything that might negatively impact their credit rating — no new accounts, no late or missed payments.
2. Save for a bigger down payment. One way to minimize risk for a lender is to make a higher-than-minimum down payment. The average down payment today is around 10 percent; historically the standard has been 20 percent. Anything above that lowers the loan-to-value ratio, which is viewed positively.
3. Choose the right loan. If you have less money for a down payment but have good credit, you may qualify for a conventional loan with private mortgage insurance and a down payment requirement of 3 to 5 percent.
You may want to look for a lender who issues FHA loans, which are often available to borrowers with less cash or a lower credit score and require a down payment of 3.5 percent. Keep in mind these loans require a monthly mortgage insurance payment in addition to principal and interest, Sharga says.
4. Manage your debt. Lenders are reluctant to issue loans that fall outside qualified mortgage rules established by the Consumer Finance Protection Bureau (CFPB). These loans have a strict cap of a 43 percent debt-to-income ratio, which is the percentage of your gross monthly income that goes toward the minimum payment on all your debt, including your mortgage.
Paying off credit card balances or at least reducing debt before applying for a home loan is helpful!!
5. Buy within your means. Be realistic with your monthly income!! Buy a house with a monthly payment you can afford. Buying a house that needs the income from two or three future raises will only cause stress.
6. Demonstrate stability. Lenders look for signs of personal and financial stability, such as whether you’ve saved three to six months’ worth of expenses in the bank, whether you have a steady employment record and how often you’ve moved over the past few years. Your good credit score and a pattern of saving money are both indicators of financial strength.
7. Have all your financial records in order, including pay stubs, bank records, tax returns and more. Incomplete documentation is a common reason for loans being declined.
While it should go without saying, honesty is an essential component of a loan approval. No one likes surprises, especially loan underwriters, so ell the truth, even if it hurts. It will help even if it means that you don’t qualify today.