Becoming a homeowner is a significant milestone in your life. Whether you plan to build your dream home or explore the existing houses on the market, it is an exciting process. However, applying for a mortgage can be a daunting process if you’re a first-time homebuyer.
As housing prices continue to soar, eligibility for home loans is becoming increasingly difficult. Here are five tips to improve mortgage eligibility, giving you the best chance at securing a home loan.
1. Monitor and Improve Your Credit Score
When you apply for a mortgage, one of the first things your lender does is check your credit score and analyze your credit report. As a borrower, you should do this too. Your credit score is one of the biggest factors in getting approval for a mortgage. The higher your score, the lower the interest rate you’re likely to qualify for, so your home costs you less over the life of the loan.
Your credit score is a number, usually ranging from 300 to 850, that demonstrates your creditworthiness or ability to repay a loan on time. Credit bureaus use a scoring model based on data from your credit report to calculate your score.
The FICO scoring model is the most widely used today and puts the following weights on each category when determining your creditworthiness:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
Since lenders use your credit score to decide on loan approval and set your mortgage rates, you must monitor your score. According to Experian, the minimum FICO score for acquiring a standard mortgage is around 620. Fortunately, there are several ways to boost your credit quickly, such as:
- Keep your credit utilization ratio to no more than 30% of your total credit limit
- Pay your bills on time
- Pay your off debts like credit cards if possible
- Don’t make any big purchases before getting approved for a mortgage
- Dispute errors in your credit report
Many lenders provide a selection of mortgage options for customers with varying credit scores and financial situations. A score between 800 and 850 is typically regarded as exceptional when applying for a mortgage loan.
2. Save for Your Down Payment
A down payment is an amount you need to pay upfront when buying a home. Mortgage lenders typically require applicants to make an initial contribution to qualify for the loan. The size of your down payment depends on the price of the home and the value of the mortgage loan you need.
A 20% down payment is the figure that major lenders typically like to see. Create a financial plan to save for your down payment. If 20% is unrealistic for your situation, you may still qualify for a mortgage, but your monthly payments will be higher, making you a bigger risk for the lender.
Many mortgage lenders also offer special rates to first-time buyers, allowing them to make a down payment of less than 20%. If you apply for a mortgage with the U.S. Federal Housing Administration (FHA), you can expect to pay as little as 3.5% as your down payment if you qualify financially. However, FHA loans come with high-interest rates and mandatory annual insurance premiums of 0.45% to 1.05% of the loan amount.
3. Prepare All Relevant Documentation
To help expedite the process, gather all the documentation you’ll need to support your loan application. This includes:
- Copies of your W-2 tax forms for the past 2 years
- Pay stubs (or equivalent) from the last 30 days
- Recent bank statements for all of your financial accounts
- Signed personal and business tax returns
- Profit and loss accounts (for a self-employed professional)
- Signed copy of the official purchase and sales agreement
Depending on your lender, you may need to provide additional information or documentation.
4. Determine the Right Type of Mortgage
Not all mortgages are the same. It’s essential to understand the options available to you before determining which type of mortgage loan you need. The most common types of mortgages are:
Applicants with good credit and substantial down payments are ideal candidates for conventional loans. Mortgage payments are typically set at a fixed interest rate. The government does not secure conventional loans. They are broken into two categories: conforming and non-conforming.
Conforming loans follow the regulations outlined by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. A non-conforming loan doesn’t adhere to GSE guidelines but may be offered by some flexible lenders.
The U.S. federal government insures government-backed mortgages. They are an excellent option for buyers who have access to them. Government loans have different requirements and are often easier to qualify for. For example, low-income buyers may be eligible without putting any money down.
Popular government-backed mortgages include FHA loans, Veterans Affairs (VA) loans, and U.S. Department of Agriculture (USDA) Rural Development loans.
Jumbo mortgage loans
Jumbo and non-conforming conventional loans are available for properties that are too expensive for conventional loans. The Federal Housing Finance Agency (FHFA) determines the maximum value of a conventional loan for various counties. Jumbo loans usually command larger down payments, higher interest rates, and higher closing costs than other loan options.
You should also determine whether you want a fixed or adjustable-rate loan. Fixed rates provide financial stability and predictability in your mortgage payments, though they are often higher initially than an adjustable-rate. Adjustable rates fluctuate, creating some uncertainty about the long-term cost of your mortgage.
You’ll need to decide on the mortgage term. Although 30-year mortgages are standard, you may prefer a shorter term of 10 or 15-years. You can use an online mortgage calculator to see how your repayment term affects the monthly cost of your mortgage.
Shop around to get the best available deals. Remember that the lender offering the lowest interest rate isn’t necessarily the best option. Consider whether the lender can provide you with a government-backed loan, if they can offer you pre-approval to lock in your interest rate before shopping, and whether they can help you take part in a first-time homebuyer program.
5. Get Pre-Approved
Getting pre-approval for your mortgage is a huge benefit when house hunting. After reviewing your documentation, the lender can typically give you the value of the mortgage loan you’ll qualify for and the interest rate they are able to offer based on your chosen term.
Most lenders allow you to lock the interest rate for one to two months. This enables you to shop for your home with confidence and means you can put down an offer quickly if you find a suitable property.
Navigate the Home Loan Process With Finance is us
There are several ways to improve your chances of approval and secure the terms and conditions you want. By educating yourself about the mortgage process, you can better prepare for your application.
At Finance is us, we offer financial information to help prospective buyers navigate the home loan process smoothly and confidently. Visit Finance is us today for more guidance regarding mortgages, loans, banking, and other financial topics.