Many first time home buyers need a little guidance through the home buying process. The main question you may be thinking is…
How do you get approved for a home loan?
Mortgages are complicated and very confusing for consumers. However, it doesn’t have it be.
In this article we will simplify the process of applying for a mortgage.
How First Time Home Buyers can get approved for home loans
First time home buyers with bad credit
If you’re a first time buyer with credit issues, you can still get approved for a home loan. FHA mortgages are one of the more popular types of home loans for first time buyers and home buyers with bad credit. This is because FHA loans are easier to qualify for than traditional mortgages because they require low credit scores and have low down payments.
Low income first time buyers
The average income of a first time buyer is lower than the income of consumers buying their second home. Government backed mortgages are great because they have flexible DTI ratio requirements. There are low-to-median income home loan options that are offered through FHA, VA, and USDA loans. Speak to a loan officer for more information and to see if you qualify.
Down payment assistance and grants
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.
Check your credit scores and report
Credit is one of the biggest stumbling blocks consumers face when applying for a mortgage. The minimum credit score needed for a mortgage will depend on which type of loan you’re applying for. Over 50% of first time home buyers have lower credit scores than the average borrower. You will want to maximize your credit score before you apply for a mortgage to increase your odds of getting approved.
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
Make sure your credit score is as high as it can be
A few points can be the difference in getting denied, and get approved for a loan. Your credit score is also the biggest factor in determining your mortgage rates. 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.
Tips to maximizing your credit scores
- Pay down the balances on your credit cards
- Make all your payments on time
- Do not apply for, or open any new credit
- Dispute negative items on your credit report
Which type of mortgage is best for you?
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.
FHA Home Loans
FHA 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 loans are the most popular mortgage among first time home buyers, and buyers with bad credit.
VA and USDA Home Loans
VA and USDA loans don’t require a down payment so you can finance a 100% of the purchase price. Both of these mortgage programs require a 620 credit score. VA loans have no mortgage insurance, while USDA loans have the lowest MIP rates of any loan type. You need to purchase a home in a rural development area to get approved for a USDA home loan. Veterans will need a VA certificate of Eligibility to qualify for a VA mortgage.
You can speak to a loan officer to go offer the different options and find the best loan for you.
How much money you need to have saved for a mortgage
You will need a certain amount of cash in the bank to buy a home. Most lenders want to see at least 2 mortgage payments in reserves. If you’re living paycheck to paycheck then it probably isn’t the ideal time for you to apply for a loan. You will also need to have the down payment. 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%
Mortgage closing costs
Closing costs and origination fees are fees charged by the lender for providing the loan. Typically closing costs fees range between 2% – 5% of the purchase chase price of the home. However, you do not have to pay these fees up-front, they can be rolled into the loan.
Can you afford to buy a home?
The first thing you need to do is make sure you can afford a home loan, and how much money you can borrower. If you are already renting a house chances are that your monthly mortgage payment would be less than your rent. Lenders will look at your DTI (debt-to-income) ratio. DTI is your monthly debt obligations compared to your monthly income.
For example if you make $5,000 per month and you pay $500 a month towards a car payment and credit cards. You will need to add your estimated monthly mortgage payment to your debt obligations to figure out your DTI. If your mortgage payment will be $1500 a month, your total monthly payments would be $2,000, or a 40% DTI ratio. To get approved for a home loan you will need a DTI ratio under 41-43%.
How to get pre-approved for a home loan
Once you have determined that you have the credit, enough money saved, and can afford a mortgage. It’s time to get a pre-approved letter so you can start your home search. Contact a loan officer and let them know you want to a pre-approval letter so you can get a home loan. They will need to run your credit, collect some income documents, and make sure you have the funds for the down payment.
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
What does pre-approved mean?
Being pre-approved for a mortgage means a lender has pulled and reviewed your credit report and scores, income documents, tax returns, and bank statements to ensure you meet the qualifications for a home loan. The maximum amount you can qualify for and estimate mortgage rate is also stated on the pre-approval letter.
Pre-approved vs Pre-qualified
A pre-qualification letter means a lender pulled and reviewed your credit and used a borrowers oral statement to figure income and borrowing amount. Pre-approved means a lender not only reviewed your credit, but also received and verified income documents and bank statements and based on the initial 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 for a home loan.
Bad Credit FHA Home Loan Lenders
Even though the Federal Housing Administration accepts borrowers with a 500 credit score, that doesn’t mean lenders have to follow suit. FHA loans are available to borrowers with a 580 credit score and a 3.5% down payment. Here are some tips to help you find the best mortgage lenders.
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.
Frequently Asked Questions
How do you apply for a mortgage loan?
You can apply with lenders or banks locally by calling them or just walking in. Online lenders can be found by doing a Google search. There are mortgage lender referral services where you enter your information once and they send it to multiple lenders so you can compare offers.
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.
What do I need to apply for a home loan?
A lender will require a credit check, proof of income, employment, and savings. You will need to have your W2’s, 2 years of tax returns, paycheck stubs, and 2-4 months of bank statements. This will get you a pre-approval letter. Check out our mortgage document checklist here.
What is the difference in a pre-qualification and pre-approval?
A pre-qualification means a borrower meets the credit requirements for a mortgage. The lender pulled credit but did not verify employment or income documents required for a loan. Being pre-approved means a lender verified credit as well as income, tax, and bank documents.
A pre-approval means a borrower is very likely to qualify. A pre-qualification means a borrower has the credit to qualify, but has not has any other requirements checked.