Are you looking to purchase a new home? It’s an exciting time. It’s also a terrifying time as you wonder if you’ll be approved for a mortgage, whether there are houses on the market you’ll like, and if you can afford the house payment once you secure the loan. With so many questions, the first answer you need to obtain is approval for a loan. Without approval, nothing else matters.
Thankfully, there are ways to get loans approved for your next home purchase. If this is your first time buying a home, you’ll need to understand how to get loans. It’s not as simple as walking into the bank and asking for a home loan. Here are 10 expert tips for not only getting a mortgage pre-approval but also landing the amount of money you can afford to pay back.
1) Know Your Credit Score Ahead of Time
You might think you have a great credit score. It’s better to know for sure. You might be surprised as to what pops up on the credit report that you didn’t know was there.
It doesn’t affect your credit score to look into your report. So, do yourself a favor and look into this well before you decide to buy a house. This gives you time to correct any issues you might have.
Nerdwallet has an excellent credit score service that is free. It will also provide tips for improving specific problems found within your credit report. Even if you have paid everything on time there may be problems you need to correct.
2) Correct Your Credit Score
Chances are there are some improvements you can make to your credit score. If you want to land a better lending rate, which can save you thousands of dollars over the course of your mortgage, correcting your credit score will help.
One possible problem is the amount of credit you have used up. This can hinder you in two different ways. First, the overall percentage of credit you have used may be too high, which can lower your rate.
The second problem is if a specific line of credit is maxed, or almost maxed out. If you have $18,000 of $20,000 credit used up, it means you have 90 percent of your credit used, which is not great. You need to work paying this down first. According to The Balance (2018), a good credit utilization ratio is 30 percent.
Dropping down to 30 percent may not be an option for you (at least not for a few years). If the rest of your credit score is good, then it helps make up for it. However, even if you’re able to drop it down from 90 to 70 or 60 percent that will move your credit utilization score from “poor” to at least “average.”
However, you want to lower different lines of credit at the same time. If you have four credit cards making up the $20,000, paying one off completely will help with credit utilization, but it still leaves three other cards at nearly maxed out numbers. It’s better to lower each of the lines of credit until none are considered “near credit limit.” This way, you can cut down your credit utilization ratio while also taking your cards away from the “near credit limit” max.
You may not have a clean credit report, but you can improve it before applying for a loan.
3) Don’t Miss Loan Payments
If you’re wondering what you need to be approved for a mortgage, especially if you currently have a home and don’t know how a second mortgage works (or if you’re planning on selling the first home to move into the second home). You need to make sure and never mix a payment.
This is especially the case when you’re in the process of applying for mortgage pre-approval. Should the lender re-check your credit report prior to signing off on the paperwork and they find you’ve missed a mortgage payment (or have been late recently) it can cause the entire mortgage to fall apart.
According to USA Today (2016), a single late payment in the final stages of a potential mortgage agreement is one of the worst things you can do. If something happens and money is coming in late, it’s better to pay your mortgage on time at this stage of the process and be late on other payments.
4) Money Talks (With a Down Payment)
There are available programs for first-time homebuyers in the United States that makes it possible to buy a home with little to no down payment. These programs are not all that desirable if you want to buy more than a local starter home or if you want to have an improved interest rate.
It is much better to put down a large down payment. A large down payment has the ability to not only lower your monthly interest rate, but it can make up for any less than desirable credit score.
So, if you come to the table with the ability to pay 20 percent or more in cash up front, you’ll reap the rewards in the form of a shorter mortgage, a better monthly payment, and banks will often not heavily consider your credit report.
5) Pre-Approval Doesn’t Mean Approved
One problem many potential homebuyers run into is assuming just because they are pre-approved for a certain amount, they will then automatically receive that amount of money when it comes time to buy a house.
Realistically, the closer you move to the max pre-approval amount, the less likely you are to be approved. At the top of the lending amount, if there’s one slight shift in your paperwork, your bills, or how much money you’re bringing in, you become much more likely to be denied.
So, while you might be approved for $250,000, you will be better off looking for something less than that amount.
6) Know What You Need In The Bank
You need a certain amount of money in the bank in order to land a mortgage. This will go for the down payment. You’ll also likely need money for other expenses that come up during the purchase process.
USDA and VA mortgages do not require a down payment (although it’s always good to have one). FHA requires at least a 3.5 percent down payment, as does a 203K. A Conventional 97 mortgage requires a three percent down payment, a HomePath mortgage requires at least a five percent, and a conventional mortgage (which is most likely what you’re looking at), requires between a five and 20 percent down payment (you’ll need it to be higher the lower your credit score is). Lastly, there is a jumbo mortgage, which requires between 15 and 20 percent at least (The Lenders Network, 2018).
7) Down Payment Assistance
If you’re looking for creative home loans, one of the best options is to check your qualifications for down payment assistance. The federal HUD website provides a number of perks, especially for first time home buyers. So, check out the HUD website for your state and local area. You may be surprised as to how much money you have access to.
If you are a veteran you can take advantage of the VA loans, which doesn’t require a down payment or mortgage insurance. If you are a low-income buyer you may qualify for a USDA loan, which is issued by the US Department of Agriculture. These have no down payment and a lower mortgage insurance rate.
8) Shop Around
Don’t just settle for the first mortgage rate you’re given. Even if it is from your home bank. Shop around and look for other options. Even the reduction of a fraction of a percentage point on your mortgage will equate to thousands of dollars in savings over the course of your loan. So, look around for the best rate.
9) Buying Off Season Can Help You Save Money
If at all possible, stop and consider the time of year you want to buy a house in. Most people go house shopping during the spring and summer months. The weather is nicer, it’s easier to move, and there are more houses available as families move between school years.
However, houses are usually more expensive during the summer months. Additionally, there are more buyers during the summer months, which means bidding may take place, which increases the price of the home.
If, on the other hand, you go to buy a house during the winter, while there are likely fewer homes there are substantially fewer buyers, which means you can potentially avoid a bidding war. You will also likely pay less for the home (Max Real Estate Exposure, 2016)
10) Don’t Buy Anything Big Until After Your Mortgage is Closed
Here’s a problem people run into when looking for a home. They find the right house, they are pre-approved for their loans and all they need to do is the final paperwork. To make sure they have everything move-in ready for the house they buy a new washer and dryer, plus some other appliances to move into the house once it’s theirs. Problem is, this can represent a sudden shift in the utilized credit amount, which can then prevent the mortgage from going through (or at the very least, increase the monthly interest rate).
If you want to get an approved mortgage loan and you want to avoid overpaying for it, don’t go out and buy any larger items until after you have closed on the mortgage.
Own your own home is exciting. There’s a built-in thrill when looking for new homes and envisioning your life within the house. However, before you go about doing that you need to understand how to get loans for the house. It is more complex than applying for a home loan and then going out and selecting a house. By following these 10 expert tips you’ll increase your chance of securing a loan while also reducing the amount you’re likely to pay every month.