Are you in the market for a home loan in the new year? Whether you are buying your first home or refinancing your existing one, you can improve your odds of being pre-approved for a home loan this year if you follow our helpful tips below.
#1 Make Sure You Know Your Credit Score
As you probably know, your credit score often makes a big difference in the home you can afford and how much interest you will pay. For instance, if you have a $200,000 home loan and a credit score of 740, you will pay thousands less in interest than a person with a 640-credit score. In fact, you could easily pay $40,000 less in interest or more over 30 years.
Before you begin to shop for a mortgage, take a look at your credit score and look for ways to increase it if it is well below 700. To increase your credit score, pay off debt, make all payments on time and check for any errors. If you see errors, dispute it with the credit bureau and ask for it to be removed. Check the credit score requirements for home loans today.
#2 Get an Idea of How Much You Can Borrow
Lenders will look at front end and back end debt ratios to decide how much money you should be able to borrow. The front-end ratio is your total housing payment per month including, principal, interest, homeowner’s, taxes and mortgage insurance if needed, compared to your monthly income. This ratio should not be higher than roughly 28% to 31%, depending upon the type of loan you get. And your rear end ratio should not be above 36% to 41%. This ratio includes all of your monthly debt payments compared to your gross monthly income.
Get first-time home buyer tips and check with your mortgage broker or lender to see what the debt to income ratios are for the mortgage programs you are considering. Then you can ensure that your ratios are in the proper range before you apply for your pre-approval.
#3 Have Your Documents in Order
When you first apply for your home loan, things are more rigorous than they were 10 years ago. You once could apply for a mortgage in some programs without documenting your income. These practices led in part to the mortgage meltdown because people could not really make payments on the loans. Now, you have to document your income with tax returns, bank statements, pay stubs, and if you are self-employed, a profit and loss statement for the current quarter. Also required are W-2s, driver’s license, proof of social security number, and contact information for your employers. Having all of this available will make your pre-approval process go faster.
#4 Get Pre-Approved in Writing with a Pre-Qualification Letter
We mentioned pre-approval above; this is a very important part of buying a home today. You do not have to be pre-approved to look at homes, but it makes shopping more productive. A mortgage pre-approval is essentially a mortgage approval without a specific home in mind. When you are shopping for your house, you can submit your pre-approval letter along with an offer to show you are a serious buyer.
#5 Beef Up Your Down Payment
The standard in the industry is 20% down, but you do not need that much money to buy a home for most programs. Today, you can get in some Fannie Mae programs with a 3% down payment, and 3.5% down payment for FHA loans. But if you can, put more money down. It may give you a lower interest rate, and it also will reduce the amount you borrow, thus lowering interest you pay.
#6 Have Some Cash Reserves
Many loan programs do not absolutely require cash reserves to get approved, but it can be useful if you are trying to get a bigger mortgage. You also may be approved faster with more reserves if you have a lower credit score.
#7 Ask about a FHA Loan
The best loan program for people with average or poor credit is the FHA program. If you have a low score in the 600’s or even high 500’s, you still may be approved for an FHA loan. You just need to show that you have a steady payment history in the last year or two. Getting approved for an FHA loan is one of the easiest ways to get a home today.
#8 Don’t Rule out a Conventional Loan from Fannie or Freddie
Fannie Mae and Freddie Mac continue to buy a high volume of mortgages from lending companies, because the produce competitive priced-loan programs and they are easy for lenders and brokers to underwrite. For the most part, the home loan guidelines from Fannie and Freddie are reasonable and when it makes sense they will approved home loans for people with limited or fair credit.
#9 Check with Experienced Lenders
Most people only get a mortgage quote from a single source. But you would be wise to get a quote from a mortgage broker, a bank and a credit union. If you have several possible ways to get approved for a loan, you are more likely to get approved. You also can compare the offers you get and possibly ask the lender to match the rate with another program.
#10 Pay Off Debt
If you have a lot of credit card debt, it will help to pay off a good chunk of it if you can. This will help to lower your income ratios and increase the odds of an approval.
References: 15 Mortgage Tips for First Time Homebuyers. (2017). Retrieved from https://www.fool.com/mortgages/2017/07/06/15-mortgage-tips-for-first-time-homebuyers.aspx