There are many steps involved in qualifying for a mortgage loan. With home prices beginning to level out, interest rates have risen. It is important to understand all facets of the home loan in order to qualify for it. Thankfully, there are some steps you can take ahead of time to make sure you are getting the best rates possible.
Pay Off or Eliminate Debt
Mortgage lenders are going to be looking at your DTI or debt-to-income ratio. The fewer debts you have, the better the ratio which leads to a higher chance of qualifying for a lower interest rate on your mortgage. Basically, lenders want to see that you have the financial means to afford the monthly payment on a mortgage. Generally speaking a DTI below 45-50% will get you approved for a conventional loan, but again, the fewer monthly payments and overall outgo of your income, the more comfortably you’ll afford your mortgage payment.
Add or Increase Your Income
In keeping with the theme of the DTI, another way to improve your score, as well as give yourself wiggle room, is to increase your income. Is it time to ask your employer for a review or a raise? Are you able to work overtime, pick up an extra shift, or take on a side hustle? Aside from decreasing your debt, increasing your income is your best bet in affording and getting qualified for a home loan.
Improve Your Credit Score
Another variable lenders are looking at for your qualification on a home loan is your credit score. There are several viable steps you can take in order to do this. Always start by pulling a copy of your free credit report. Look it over to ensure there are no errors or incomplete information. After doing so, get current on any bills or accounts that are behind. Next, pay on time. Even one missed or late payment can impact your score. Make sure your credit utilization is below 30%. This means that you should leave some room on your credit accounts and show that you have available credit, do not overspend, and are responsible with your management of credit.
Save for a Substantial Down Payment
When you consider the power of increasing your income, one other way to put those extra dollars to work is to save up for a significant down payment. Some loan products require a zero amount down like the V.A. loan. While others, like the FHA loan, only require a small 3%- 5% down payment. If possible, by taking a conventional loan and putting down 20% you not only increase your chances of getting qualified, you will also avoid the required Private Mortgage Insurance (PMI) that many lenders require. To pay for a home that is $250,000, you would need to save up $50,000. However, if you are disciplined enough to save up and put down such a hefty down payment, you will enjoy a lower monthly payment and a smaller loan principal in the long run.
For the average person, a home loan is one of the most expensive and significant purchases of their lifetime. With the magnitude of that, you should always consider shopping around. Whether it is shopping around for the right house, in the right neighborhood, at the right price, or simply shopping around for a different lender, use your buying power to your advantage. Some lenders may be able to look for creative ways to help you qualify for a home loan such as adding a co-signer, extending the loan term, or using an alternative loan type.
Once you are ready to get the loan qualification process started, just be sure to gather and have on hand all necessary documents such as tax returns, W-2s or other proof of income, bank statements, credit history, employment, and rental history.