“There’s no place like home. There’s no place like home!” Have you found the right home for your family, but you are not sure if you qualify for a home loan? The home buying process is complicated and can sometimes be stressful. Preparation is key. Keep these tips in mind to ensure the loan qualification process goes smoothly.
Six Tips to Help You Qualify for a Home Loan
1) Have a Down Payment
One requirement determining your mortgage eligibility is your loan-to-value ratio (LTV), or the relationship between a home’s value and the amount of loans against it. The bigger your down payment, the lower the LTV ratio (that’s a good thing). If possible, your maximum LTV should be 80 percent. This means you need to come up with a 20 percent down payment. Don’t worry though, even a 10 to 15 percent down payment can help establish you as a serious buyer to a mortgage lender.
Bigger down payment = Greater chance to acquire a home loan
2) Know Your Credit Score
Another major factor lenders use to qualify home buyers for a loan is their credit score. A credit score of 720 or better will earn you the most favorable mortgage rate. A lower score may still get you approved, but not at the lowest interest rate. If your credit score is less than 620 and your down payment is less than 20 percent, lenders may decline your loan application. Under federal law, you have a right to obtain a free copy of your credit report from each of the nationwide consumer reporting agencies once a year. Order your free credit report at annualcreditreport.com.
Shoot for a credit score above 720
3) Are you Pre-qualified?
Pre-qualifying for a home loan allows you to compare loan details without having your credit accessed by a mortgage lender. Getting pre-qualified not only gives you leverage as a serious buyer, but it also helps you determine what you can afford.
Get pre-qualified to understand how much you can afford
4) Know Your Debt-to-Income Ratio
Mortgage lenders require that your total monthly debt and expenses—car loans, credit card bills, student loans, insurance, maintenance—be no more than 46 percent of your gross monthly income (this is your income before taxes and other deductions).
Low debt-to-income ratio = Greater chance of qualifying for a home loan
5) Employment History is Important
Borrowers who have worked at the same job for more than two years receive more favorable consideration than someone who hops from job to job. If you’re self employed or work for commission, you may have to show bank statements to substantiate past income history in order to qualify for a home loan.
Steady employment = Greater chance of qualifying for a home loan
6) Know How Much Your New Home Will Cost
One online resource that can be helpful as you begin your home buying journey is a mortgage rate calculator. Plug in a home’s price, down payment, interest rate, and amortization period (length of time you need to pay off the loan) and find out the estimated payment amount, interest paid over the life of the loan, and other costs such as property tax and mortgage insurance.
Do the research to understand what you can afford.
Keep these tips in mind to reduce the stress of the home buying process. Address any potential issues before you begin the process of qualifying for a loan to save you time, money, and frustration. It’s time to find your new home!
Ready to find out if you qualify for a home loan? CIS Home Loans, a full-service mortgage bank, has served homeowners since 1991. The personal relationships we form during the loan process are as important to us as the loan itself. It is why Character, Integrity, and Service make up our name, CIS Home Loans.