So how do you get approved for a home loan?
Mortgages can be complicated and confusing for many homebuyers.
It doesn’t have it be.
In this article we will simplify the process of getting a home loan.
1. Get Your Credit Report and Scores for Free
To get a home loan there are several factors that come into play, but your FICO score is the most important.
You can check your credit report and get your scores online for free.
Credit Karma has a great tool that allows you to view your credit history and gives you updated credit scores. You can also monitor you credit and get alerts whenever there are changes to your credit.
2. Look for Errors on Your Credit Report
You will want to review your credit closely for errors. Mistakes on credit reports is a bigger issue than you may realize. In a study by the FTC they found that 1 in 5 consumers had at least one error on their credit report.
If you do find inaccuracies you can dispute them with the three major credit bureaus. They have 30 days to investigate your dispute, if they find that the item in question is inaccurate they will correct it.
Where to Dispute
- Experian: 888-397-3742
- Equifax: 888-548-7878
- TransUnion: 800-916-8800
You can also file a dispute online:
- Experian: https://www.experian.com/disputes/main.html
- Equifax: https://www.equifax.com/personal/disputes/
- TransUnion: https://dispute.transunion.com
3. Improve Your Score Before Applying
A few points can be the difference in whether you qualify or not. Your credit score not only determines is you qualify but is also the biggest factor in determining the interest rate you receive.
Make sure you are getting the best mortgage rates by maximizing your credit scores.
There are a few things you can do to increase your scores before you speak to a lender.
These tips can help increase your credit score in less than 45 days.
Pay down the balances on your credit cards
Your credit utilization ratio is your credit limit divided by your card balance. This ratio accounts for 30% of your overall FICO score, only payment history has a bigger impact.
For example if your credit limit is $10,000 and your balance is $6,000 your utilization ratio is 60% which is very high. The lower your credit card balances are the higher your credit rating will be.
I recommend keeping your balances below 20% of your credit card limit.
Make all your payments on time
With 35% of your credit score based on payment history it’s very important to pay all of your bills on time. A single late payment could drop your score by as much as 75 points.
If you’re a forgetful person you can set up auto pay with your creditors so you never miss a payment.
Do not apply for, or open any new credit
If your going to be in the market to buy a house in the near future it’s a good idea to not open any new accounts.
A hard inquiry is when a lender checks your credit and inquiries can negatively impact your credit score. It’s best to hold off on buying a new car or opening a credit card until after you close on your mortgage.
4. Get Pre-Approved
You’ll want to get pre-approved for a home loan before you give up your hopes up. A pre-approval means a borrower has completed a mortgage application and a lender has checked credit and verified income and assets.
Documents needed to get a pre-approval letter
- W2’s for the past 2 years
- Paycheck stubs from the last 3 months
- Tax returns from the past 2 years
- Credit report and scores pulled
Pre-Approved vs Pre-Qualified
Being pre-qualified for a mortgage is not the same thing as being pre-approved.
Pre-Qualification just means that a lender believes you may meet the requirements for a loan based on a soft inquiry into your credit history. Lenders pay the credit bureaus for lists of consumers in certain credit brackets. They don’t actually get to view your credit report or Fico score.
Think getting a pre-qualified credit card offer in the mail, you didn’t even speak to them so really it doesn’t mean much of anything.
A mortgage pre-approval means a lender not only reviewed your credit history, but also verified income documents and bank statements and based on the information the buyer should qualify for a mortgage loan.
A pre-approval is must stronger than a pre-qualification and shows a borrower is much more likely to be approved.
5. Check Your Savings
You will need a certain amount of cash in the bank to buy a home.
If you’re living paycheck to paycheck then it probably isn’t the ideal time for you to apply for a loan. There are more upfront costs associated with getting a mortgage loan besides the down payment.
Closing costs are fees charged by lenders for issuing the loan. These fees can range between 2%-5% of the loan amount.
Here are some good ideas on saving to buy a house. The down payment amount will vary depending on the type of mortgage you apply for.
Down payment needed by mortgage type:
- FHA – 3.5%
- VA – No down payment
- USDA – No down payment
- 203k – 3.5%
- Conventional – 5% – 20%
- Conventional 97 – 3%
- Jumbo – 15% – 20%
- HomePath – 5%
6. Check Your Budget
Use our home affordability calculator to see how much you can afford. The maximum loan amount you qualify for will be determined by your debt-to-income ratio. Debt-to-income ratio is calculated by taking your monthly debt payments and dividing it by your monthly gross income.
The maximum debt-to-income ratio lender require is typically 43%
For example if you make $5,000 per month and you pay $500 a month towards a car payment and credit cards. you have a debt-to-income ratio of 10%. Now let’s say your monthly payment is $1,500 your total monthly payments are $2,000 meaning your back end DTI ratio is 40%.
In order to qualify for a mortgage loan you’ll need to meet the minimum credit score requirement. Credit guidelines will vary depending on the lender.
Generally a 620 credit score is needed to get a home loan.
Typical mortgage credit score requirements:
- FHA Loans – 580
- VA Loans – 620
- USDA Loans – 640
- FHA 203k Loans – 640
- Conventional – 620
- Conventional 97 – 640
- Jumbo Loans – 700
- HomePath – 640
7. See if You Qualify for Down Payment Assistance
First time home buyer down payment assistance and grants are available throughout the country.
You can check on the HUD website for state programs.
You should also visit your local Government city or county website to check for other first time home buyer program in your area.
8. Familiarize Yourself with the Types of Home Loans
There are several different types of mortgage programs for you to choose from. Finding the right loan type really depends on your situation.
Conventional mortgages are good for buyers with credit scores of at least 620, with decent income, and a large down payment.
Home buyers with poor credit, low down payments, and low income could still qualify for Government home loan programs.
Conventional loans are offered by private lenders and are not insured by the Government, but by private mortgage insurance companies. The down payment for a conventional mortgage is higher than government-backs loans, typically requiring between 5% – 20% down.
A benefit of conventional financing is that borrowers can avoid paying mortgage insurance premiums if the loan-to-value ratio is 80% or lower.
FHA mortgage loans have become popular among first time home buyers. This is mainly because of the flexible credit score requirements.
You can get pre-approved for a FHA home loan with a 500 credit score, and 10% down.
If you have a 580 credit score you can get approved for an FHA loan with a 3.5% down payment. This is why FHA-insured home loans are the most popular mortgage among first-time homebuyers, and buyers with bad credit.
The US Department of Agriculture created the USDA home loan program to help low-income buyers in rural parts of the country become homeowners
These loans come with a zero down payment and have the lowest mortgage insurance premium of any mortgage type.
You need to purchase a home in a rural development area to get approved for a USDA home loan.
Veterans can take advantage of the VA home loan program which comes with no down payment and no mortgage insurance.
Veterans will need a VA certificate of Eligibility to qualify.
9. Choose the Loan Term
There are different loan terms for a mortgage, fixed-rate and adjustable-rate.
Fixed-Rate Mortgage – A fixed-rate mortgage loan has the interest rate locked in for the life of the loan. This ensures that the interest rate and monthly mortgage payment is consistent.
The most popular terms are 30-year and 15-year fixed-rate loans. 15 year loans come with a lower rate than a 30 year and are great for those who want to pay off their mortgage early
Adjustable-Rate Mortgage – An adjustable-rate mortgage loan is a loan that has an initial low interest rate for a fixed period of time that will adjust afterwards.
The 5/1 adjustable-rate mortgage, referred to as an ARM. The 5 means that the initial rate will be locked in for a period of 5 years. The 1 means that the rate will adjust annually after the initial period ends.
10. Compare Loan Offers
Don’t make the mistake of getting a loan with the first lender that approves you. Closing costs, lender fees, and even interest rates will be different from lender to lender.
You should get a loan estimate from at least 3 mortgage companies to make sure you’re getting a competitive offer. You can use loan estimates to help you negotiate lower closing costs and interest rates.
The Lenders Network has a large network of mortgage companies that compete for your business.
What to do if you are denied a mortgage
Just because one lender denies your home loan, doesn’t mean you should give up. You should apply with another lender. Each lender has different rules and guidelines for mortgages.
If one lender denies you, another lender may be able to help get you approved.
If you have low income or a low credit score, it may be a good idea to get someone to co-sign on the mortgage loan for you. A non-occupying co-signer or co-borrwer can be used to help a borrower get approved for a home loan.
Home Loan FAQ
How do you apply for a home loan?
You will need to complete a mortgage application and speak to a lender. You can go to your local bank or speak to our network of lenders.
What does getting pre-approved for a mortgage mean?
Being pre-approved for a mortgage means that a lender has checked your credit, income, tax and bank documents and you meet the minimum requirements to qualify for a home loan.
How to get a home loan with bad credit?
For borrowers with poor credit FHA loans are usually the best fit. Borrowers with a 500 credit score and a 10% down payment may qualify.
The Lenders Network has the largest network of mortgage lenders that specialize in home loans for borrowers with all types of credit scores. We will match you will the best lender based on your specific situation.