Most people want the American Dream, which includes owning your own home instead of renting. The homeownership dream can be an expensive one for most people, and often requires obtaining a loan to purchase the property. Before making an offer on a home, the loan application must be approved through a bank, which has a list of qualifications. There are a few factors that determine the loan's approval, interest rate, and the amount that can be borrowed.
Maintain a Good Credit Score
Lenders want to make sure borrowers will be able to pay their mortgage on time each month and maintain a good track record with what they owe. Your credit score is one of the main factors that will determine if you qualify for a loan, which will show your past relationship with debt and how likely you are to repay it in the future.
A healthy credit score is anything above 740 and a poor credit score is below 600. The credit score will list any late or missed payments, along with any accounts that went to collections or had judgments. If you have errors on your credit history, it's possible to repair the report by disputing the mistake before applying for the loan. Although maintaining a good credit score is important for qualifying for a home loan, it can also save you money by enabling you to obtain lower interest rates.
Have a Down Payment
To qualify for a home loan, a down payment will be needed, which is at least 3.5 percent of the selling price of the home. The more money you put down for the loan, the lower the interest rate will be. Ideally, you should make a down payment of ten percent.
There are some loans that do not require a down payment. Veterans are qualified for VA loans, which do not require a down payment. Buyers in rural areas may qualify for USDA / RHS loans, which is for those with incomes that are lower than 115 percent of the adjusted median income and does not require a down payment.
Lenders are more likely to approve those with large down payments, and might even allow family members or friends to contribute with a gift letter stating that the money does not need to be repaid. Lenders will also want to see that you have additional savings for your taxes, insurance, and settlement fees.
Provide a List of Assets
When completing a home loan application, lenders will ask for a list of assets, which should include your 401(k), savings, CDs, and additional income earned throughout the year. It's important to be transparent and honest to prevent delays in the process of getting approved. Along with providing a list of your assets, you'll need to disclose your income, overtime pay, and bonuses that you receive throughout the year.
Pre-Qualifying for a Loan
Occasionally, your credit will be high enough where you can get a prequalified loan. Prequalifying for a loan is when you supply the lender with your overall financial picture. This includes your debt, income, and assets. After looking at this information, the lender can give you an idea of how much you can borrow. The process can easily be completed over the phone or online, and there’s usually no cost involved. However, loan pre-qualification doesn’t include a credit report analysis or an in-depth look at your ability to purchase a home.
Most lenders will ask if you have any goals or needs for your mortgage so they can explain your options. It’s a quick procedure but isn’t final. The amount isn’t exactly what you’ll get, but rather the amount for which you may be approved.