The home buying process isn’t always easy, and without preparation, homebuyers can experience more difficulty than necessary. When you need a home loan, the hope is that your lender approves your loan application, but if you want the best possible outcome, it is equally important for you to both understand how certain factors can affect your ability to secure a home loan and what you can do to ensure your odds of approval are high.
If you are planning to purchase a home, here are a few things you should consider when applying for a home loan.
Your Credit Score
When it comes time to apply for a home loan, one of the many factors that will affect your eligibility is your credit score. It is likely that your mortgage lender will have a minimum credit score requirement, and if you don’t meet it, your loan application may be denied. It would be wise to review the minimum credit score requirement before you apply for a mortgage to ensure you have a good chance of getting approved.
If there is a lender that you prefer, but your credit score does not meet the credit score requirement, you can take the necessary steps to improve your score before you apply for a loan. Paying down a small debt, getting derogatory information removed from your report, or ensuring your bills are paid on time can all improve your credit score.
Homebuyers are often expected to put money down on their new home. This amount will vary, but people should keep in mind how their down payment can affect them. For example, how much you put down on your home will factor into the total cost of your home loan. The home may cost $200,000, but if you are putting down 10%, or $20,000, you won’t need to take out a loan for $200,000 to cover the total cost of the home.
Additionally, when you put down a larger down payment and decrease the amount of the home loan, a lender may be more open to approving your application and offering a lower interest rate, which will ultimately affect the total cost of the loan and your monthly payment amount.
In addition to reviewing your credit score, lenders will likely review your debt-to-income ratio. This number is important because it allows lenders to compare how much money you owe with how much money you make. You can calculate your debt-to-income ratio by dividing your total of their monthly bills by your total monthly income. For example, $2,000(monthly bills)/$3,500(monthly income)= 57%.
Type of Loan
Lenders offer different types of home loans, so you’ll want to determine what type of loan you will apply for when the time arrives. Depending on the lender, you may have access to loans designed for first-time homebuyers, veterans, and other buyers fitting of certain criteria. Along with these different types of loans may come different types of requirements, including the location of the home, credit score, and down payment amount.
With various types of loans existing, you can also speak to your mortgage lender to determine which is the best option for you.
Owning a home is a huge accomplishment. And as difficult as the home buying process may be for some, it doesn’t have to be. If you know where you stand, you may find fewer obstacles in your way and get approved for your dream home.