Qualifying for a home loan can be intimidating, but it doesn’t have to be. To help you get a home loan, there are some important things that you can do ahead of time.
Know your credit score
A credit score is a numerical representation of your ability to pay back a loan. Lenders use it to determine whether or not you’re a good candidate for getting a mortgage and how much money they’re willing to lend you.
The factors that go into determining your credit score are:
- How long you’ve been using credit
- How much debt you have compared with how much money you make
- Whether or not any of your bills are late (or paid)
Save for a down payment
Saving for a down payment is one of the most important steps to qualifying for a home loan. You need to prove that you have enough money to afford your monthly payments and other expenses, such as taxes and maintenance fees.
The amount you save determines how much house you can afford, so it’s an important factor in deciding what kind of home loan program will be right for you.
If this is your first time buying a home, experts recommend saving at least 10% of the house price as a down payment—but if possible, aim higher than that (20% or even 25%).
If something happens with your finances or income stream later on in life (such as losing a job), at least some equity will still exist to avoid foreclosure or short sales on properties purchased with less than 20% down payments.
Get preapproved for a mortgage
When it comes to buying a home, getting preapproved is one of the best things you can do. A preapproval process that lenders use to determine if a borrower qualifies for a home loan.
It’s essentially an offer from the lender: we will give you this much money, and here are all the details in writing so that there are no misunderstandings later on.
Preapproval doesn’t mean that you will get a mortgage—it just means that your financial situation looks good enough for us to consider giving you one.
If you have your finances in order and have been saving up for several months for your down payment, then getting preapproved can show potential sellers that not only do you intend on buying their house but also show them how serious and motivated you are about finding your dream home!
Requirements for preapproval
There are many reasons to consider using a mortgage preapproval. First, it can help you decide if now is the right time to buy.
If you’ve been thinking of buying a home but aren’t sure when the market will hit bottom, it may be worth holding off until your opportunity comes along.
Second, even if you have your finances in order and are ready for a new place where you live or invest, getting preapproved for financing allows you to shop around for mortgages with different lenders and compare rates.
Finally, as mentioned above, getting preapproved early can help speed up the buying process once it’s time for closing on your new home (and also helps prevent buyer’s remorse).
To qualify for mortgage preapproval, determine how much money is needed to purchase the property by adding together all expenses related to buying, such as down payment costs, closing costs, title insurance, home inspections (if any); transfer taxes; repairs that need to be done before moving into the property; etc.
What is the difference between pre-qualification and preapproval?
Although pre-qualification and preapproval are similar, there is a difference between the two. Pre-qualification is a good indicator of how much you can borrow and how much monthly mortgage payments will be based on a specific interest rate and loan term.
However, it does not guarantee that you will be approved for a loan or that your lender will offer you the lowest possible interest rate.
On the other hand, preapproval means that your lender has run through all of your credit reports and determined that they can approve you for their best terms and rates available at this time.
This may include being able to provide financing with specific requirements such as a down payment amount or proof of income documentation needed to secure approval with an adjustable-rate mortgage (ARM).
What factors are considered for preapproval?
The factors that determine whether or not you qualify for a home loan are mostly the same as what you need to get approved for a car loan. There are some minor differences, however:
- Income: Your income must fall within a specific range based on the type of mortgage you want and where you live. If your income is too high, there may be fees associated with getting an FHA loan—many lenders will require an up-front guarantee fee of 1% of your purchase price (which is paid upfront) if your credit score isn’t high enough to make them comfortable with giving out the loan.
- Credit Score: A good credit history is essential when applying for financing on any major purchase—not just houses!
You’ll need to have been using credit regularly over several years before applying for any kind of large-ticket item like this one; if not, then it’s time to start building up those points now by using debit cards responsibly and paying off balances in full each month (or at least as close as possible).
If you don’t have good enough credit (e.g., because income isn’t relatively high enough yet), consider applying only after reaching your goal instead of trying unsuccessfully first; if denied due solely because of the lack thereof, then try again later once everything else looks good again too!
Why is it important to get preapproved?
Getting preapproved is a step that’s often taken much too lightly. Getting preapproved can be lengthy, but it’s important to understand what you need to qualify.
Getting preapproved allows you to know how much money the bank will lend you before going out and searching for a house.
When you find one that meets your needs and falls within your price range, you won’t have any second thoughts about whether or not the house is within reach financially.
Getting an idea of how much home loan lenders are willing to loan out also helps house hunters narrow down their search criteria (e.g., number of bedrooms) and make sure that they don’t spend too much on their purchase.
Conclusion
Qualifying for a home loan is easier when you prepare yourself ahead of time. Before you start searching for houses, take the time to figure out how much you can afford and what kind of loan you want.
The best way to do this is by going to your bank or credit union and having them run a pre-qualification on you.
This will give them an idea of what kind of house payment you can afford, and it will provide them with some information they can use when they go out and shop on your behalf.