How to Qualify for a Home Loan
How to Qualify for a Home Loan
Applying for a home loan is not a difficult process if you are financially qualified. You can build credit by paying your bills in a timely manner and avoiding financial pitfalls like debt and foreclosure. You will also need to be employed in steady work for at least two years (with some exceptions like being in school or disabled). Make yourself more attractive to banks so that when the time comes to qualify for a mortgage, you will be able to.
Meeting Basic Requirements
Be able to demonstrate employability.In order to qualify for a loan, the lending institution will want to know you are capable of paying the loan back in a timely manner. Having a steady job for at least two years is usually a necessary qualification. If you’ve changed jobs or industries frequently, or otherwise have a checkered employment history, qualifying for a home loan may be more problematic.
Do not foreclose on other properties.The Federal Housing Administration (FHA) loans are only available to people who have not had a home foreclosed on within the past three years.Most lending institutions have similar rules.
- Any institution that would lend to you despite your having a foreclosure on record within the past three years will likely give you a loan only with an exorbitant interest rate attached to it. Wait several years after any foreclosures in your history to rebuild your credit and obtain a better loan from a more reputable financial institution.
Choose an appropriate lender.Your lender should provide a high level of service and advice. Your lender should work closely with you to determine your financial needs and provide clear information about their fees and interest rates. You should look into either a broker or a direct lender like a bank or credit union. Usually a broker will be able to get you a better deal. If you need an FHA or Veterans Affairs (VA) loan, make sure whatever institution you are dealing with is approved to offer insured loans through the FHA or the VA. You could ask your real estate agent to introduce you to a lender, but you should always expand your financing search to include other sources of home loans.
Present your information to the lender.With your information in hand -- including your employment history, debt, credit history, and other relevant details, your lender will be able to determine whether or not you qualify for a loan.
- Be honest when providing your information to the lender. The lender will not verify your information for inaccuracy (the underwriting process will be responsible for this later on in the process), so his or her evaluation of whether you qualify for a home loan is only as good as the info you provide.
- Remember, qualifying for a loan is not the same as receiving it. Once you’ve qualified, you’ll need to go through a more formal process in order to gain approval for your loan.
Getting the Best Possible Loan
Talk to multiple lenders.Try to qualify for the same loan -- for instance, 0,000 -- at the lowest possible interest rate by talking to brokers, lenders, banks and credit unions. Keep in mind, though, that low interest rates (and therefore low monthly payments) mean a longer repayment period, and could mean that you end up paying more over the life of the loan in interest. Always compare loans with similar payback periods, that is, compare 15 year loans only to other 15 year loans and never compare a 15 year loan to a 30 year loan from different lenders.
- Checking the Annual Percentage Rate (APR) is the easiest way to compare different loan packages. The APR will tell you the overall price of the loan you qualify for, including mortgage points, lender fees, and interest.
- Remember not to confuse APR with the interest rate. APR represents the cost of a loan as a percentage.
Increase your household income.Typically, you will qualify for a loan that will be paid back over a given period -- 25 to 30 years, generally -- in monthly payments of between 25%-30% of your monthly household income.By increasing your income, then, you will qualify for a larger loan.
- Look for opportunities to make more money. If possible, get a second job, or ask for a raise or promotion at your current job.
- If you are married, your spouse’s income will also positively affect your ability to qualify for a home loan.
Keep up with your credit score.You’re entitled to three credit reports each year -- one from each of the three major credit agencies. The credit reports will help you identify ways to improve your specific score (though these free reports will not give you your actual score). Visit AnnualCreditReport.com to learn more about how to obtain your credit report.
- Since each credit agencies have distinct data bases, it is usually good to order reports from each one at the same time, so you can confirm that one does not have an issue that needs to be resolved that the others don't have.
- Consult your credit reports before taking out a big loan -- like a home loan -- to get an idea of whether you’ll qualify for a good rate or not.
Get a right-sized loan.Your home loan should be be paid off in monthly payments of around 25% of your monthly after-tax income.For example, if you earn ,000 each month, your monthly home loan payment should be no more than 0.
- Wise lenders usually will not want to extend a loan to someone who cannot pay it back. You are unlikely to qualify for a home loan when your monthly total debt payments (not just the debt from your home loan) exceed 43% of your monthly income, though loans may occasionally close at higher percentages.
- Though Dodd-Frank legislation has made this rare, some banks will permit or even encourage you to take on an unaffordable loan in the hopes that you default and they can repossess your house or other collateral. Don’t let yourself be roped into a loan that is greater than what you can afford.
Improving Your Credit Score Over Time
Pay your bills on time.If you pay your bills on time, it demonstrates that you are responsible with money, and suggests to lenders that you will pay your mortgage in a timely manner, too. Paying bills late makes potential lenders assume that you are a risk and will stop paying your mortgage altogether.
- Rental history is only included in the evaluation of your ability to pay bills if there is not enough credit history available for evaluation. More than one late rental payment in a year could make it hard for you to qualify for a home loan in this case.
Keep your credit card balance low.When you charge something to your credit card, pay it off immediately. Keep a low credit limit on your card and pay the entire balance off monthly. Also, try to use mostly cash and use your credit card only a few times each month. This way you will not accumulate debt that gets out of control.
Try not to open new credit accounts.Instead of opening many credit cards and maintaining a balance on all of them, stick with one credit card and pay of the balance regularly. The more credit cards you have, the harder it will be to keep your overall debt low, and the more likely you are to hurt your credit score due to missed or late credit card payments.
- If you are early in your credit career, it may be better for your score in the long run to have a few cards, as long as you keep the balances low. Do not try this strategy if you think you will have difficulty keeping track of your balances and making the payments.
- Each time you make a request for new lines of credit -- including loans and credit cards -- your credit score drops slightly for one year. Limit yourself to one or two loans each year.
Pay off your debts.If you move around your debt through refinancing or other financial strategies, you could hurt your credit score. If you already have a loan out, pay it off as soon as possible. Paying ahead on your loan will not only reduce the interest you accrue, it will also show lenders you are responsible with your finances.
Don’t try to remove old debt on your credit history.Many people contact credit reporting agencies in an attempt to have debt expunged from their credit history when they’ve finished paying off a loan or closed an account. However, if you’ve paid off a loan or other debt in a timely manner, you should leave it on the credit report, since it can improve your credit score.
- Bad debt (debt that has not been paid within the originally agreed-upon terms) will influence your credit report for seven years. Nothing can be done to remove it, unless it was an error.
- Avoid closing old accounts. Keep a paid-off credit card without a balance.
QuestionIf I collect a disability pension can I still get a home loan?wikiHow ContributorCommunity AnswerYes, you can still qualify for a mortgage with a disability pension. Organizations like Habitat for Humanity and government programs like Section 8 can help you obtain a home loan even on a fixed income.Thanks!
- Understand the nuances between different types of loans.
- If you don't know much about the mortgage business, ask someone you trust to help you. Applying for a mortgage can be a daunting task and you don't want to sign yourself up for something you are not sure about. Don't just get qualified for a loan; get qualified for the right loan.
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