For most people aspiring to become a homeowner, getting a home loan is all part of the process. But if your credit is less than perfect, and you’re living from paycheck to paycheck, then getting a mortgage can look hopeless. Lenders want the assurance that an applicant can pay back the loan and won’t go into foreclosure. So you’ll want to show them you’re a stellar applicant that’s got everything together. Here are four steps you can take to give yourself the best chance of being approved for a home loan.
1. Make a large down payment
Lenders like to see an applicant with skin in the game. That means making as large a down payment as you possibly can. As the lender sees it, the more you put down on a home, the less likely you’ll be to walk away and let the property go into foreclosure. Making a large down payment is also an indication of how well you handle your finances. If you can demonstrate the means to save up a hefty down payment, then you should have little trouble making your mortgage payments on time.
The standard advice is that you should aim to make a down payment of no less than 20% of the homes purchase price. If you can do that, you’ll also be awarded a lower interest rate. If you don’t have a down payment saved, then get to work now saving for it. Start a home savings account, cut back your expenses, and set aside a percentage of your salary each month. With a little patience, you’d be surprised how much you can save in a year or more.
2. Raise your credit score
Your credit score plays a big part in determining your approval for a mortgage and, if approved, what your interest rate will be. Your score depends on a range of factors such as previous loans, credit card history, debt, etc. In general, you’ll need a score of at least 620 to qualify for a conventional mortgage. To get the best rates, you’ll need a score of 740 or higher. If your credit score is low, then maybe you should avoid buying a home until you’ve raised it a bit.
You can raise your credit score by paying all your bills on time and reducing your debt. It sounds counterintuitive, but you can also raise your score by borrowing over time such as through a credit card. This increases the length of your credit history which is a factor in deciding your credit score. However, you need to be careful and ensure you make all your payments on time. You should also check your credit reports for any errors. By federal law, you’re entitled to a free credit report every year from each of the three credit reporting agencies (Equifax, Experian, and TransUnion). Request yours and if you notice any errors have them amended.
3. Provide all requested paperwork and more
Assessing an applicant for a loan requires a lot of paperwork, and if you want to avoid delays, you should have all of yours in order when you apply. At a minimum, you’ll need W-2 forms going back two years, paycheck stubs going back several months, proof of rent payments for the last year, tax returns, proof of deposits, and a list of all your debts and assets. Talk with a loan officer to find out what you’ll need.
When it comes time to apply, bring all that’s needed and more. Mortgage applications can be delayed if the underwriter requires extra paperwork. So if they require paystubs going back three months, bring paystubs going back six months. Be as open as you possibly can in showing your financials. If there’s anything at all in your financials that could raise concern, then you can be sure that they’ll find it. Better to mention it now so you can immediately start rectifying it.
4. Get help from an exclusive buyer’s agent
If you’re already certain of where you want to buy, then seek the help of a professional buyer’s agent. An agent with experience helping buyers in your area and working with your chosen lender will be invaluable in guiding you to the finish line. They’ll not only help you with finding a home within your budget, but also advise you on getting qualified for a mortgage.
For the best results, you should choose an exclusive buyer’s agent. This is an agent that works only with buyers, which means they have the most experience in helping clients get qualified for a mortgage. It costs nothing to set up a meeting with one, and if they strike the right chord with you the mortgage application will suddenly look a lot less intimidating.
If you don’t get approved for a mortgage, don’t let it discourage you. Instead, take it as an encouragement to get your finances in better order. Many people get rejected on the first try but succeed on a later application, once they understand what held them up. The steps above will aid you best when you start as early as possible. Get to work saving on that down payment, start paying off your debts and raise your credit score. Just make sure to create a realistic plan and stick to it.