Becoming a homeowner is an exciting adventure – even if it is not your first time buying a home. However, home loans are a large risk for lenders which is why getting approved for a home loan can seem like such a tedious process.
In order to make applying for a home mortgage loan an easier process and to improve your chances of getting approved for the loan amount you want, here are a few tips to increase you chance of getting approved for a mortgage loan.
- Start preparing early. This is the most important thing to remember. Buying a home can take 45 days on average and you will want to plan well in advance to ensure you are in the right financial stage of your life to move forward with the process. At least 6 months before you are ready to buy (although a year is more ideal) begin to watch your spending, start saving, pay down balances on lines of credit, and begin to research areas you are interested in buying in.
- Pull your (free) annual credit report and check for errors. Every year, individuals are able to have a full, in-depth report pulled for free from each of the three main credit reporting agencies. These reports will show each line of credit you have open, which are closed, any credit or loans in default, your total debt, your credit score, as well as who your lender is for each. Review your report thoroughly and check for errors. Common mistakes include information reporting when you are only an authorized user or accounts that are no longer in default/collections still showing as such. Keep in mind that most credit agencies report once a month to the credit bureaus, so some errors may not have had a chance to be corrected. Since you are planning to buy a home, any negative information can affect your lending chances so it is still advisable to contact the credit bureau and have the information corrected.
- Continue to monitor your credit. Depending on how far in advance you are planning, you should continue to monitor your credit. There are many options than enable you to do a “soft” check of your report (meaning checking won’t harm your score) and alerts you to any major changes (like a new line of credit is opened). Keeping track of the health of your credit history will help reduce surprises when you home lending company pulls a full report when the time comes
- Improve your score. The best way to do this between now and applying for a home loan is to reduce the overall balance on your credit cards, car loans, school loans, or other lines of credit. Have less debt improves your debt-to-income ratio and shows home lenders that you have enough income available to also pay on a home loan. You can also improve your score by making payments on time every month. Avoid opening new lines of credit as these inquiries are considered a hard pull and can negatively impact your score.
- Save, save, save. While many home mortgage companies have loan options that require no down payment, the less you have to borrow, the better for you in the long run. Loans with better terms and lower interest rates typically require some amount down – as low as 3% but as high as 20%. Plus, there are closing costs and fees to consider and the cost of a home inspection and appraisal are also the buyer’s responsibility.
- Check your budget. It is important to only borrow what you know you can afford to repay. Also consider what you can afford to repay should your financial situation take a turn for the worse – can you easily get a new job working in the same industry or at the same pay? If you are paying rent, a monthly mortgage payment should be close in amount and will be easy to show your mortgage lender that you have already successfully afforded that amount monthly.
- Be financially savvy. Just because you are approved (or pre-approved) for a larger amount does not mean you should borrow the amount in full. Consider what a large home loan will cost you every month and if you will be able to afford it without struggling. Use the home loan limit to help you better filter homes and select the best home based on the size, design, location, and other aspects that suit your needs.