Banking regulations really changed after the housing market collapse. While lenders used to offer mortgages to most applicants, the criteria to qualify for a mortgage loan has become tougher. Here are five things you need to know about qualifying for a home loan.
Get Your Credit Report in Order
Most home loan companies look for credit scores that are over 700. If yours is lower, you may still get the loan, but your interest rate will be higher. This means, you're spending a lot more money over the life of a 10, 15, or 30 year loan. Before you apply for a home loan, take a close look at your three credit reports. Per federal laws, you are allowed to view them for free once a year at AnnualCreditReport.com. Go over every account and make sure that you notify Equifax, Experian, and TransUnion of any errors. It takes up to three months to fix errors, so do this well in advance of applying for your mortgage.
Calculate Your Debt-to-Income Ratio
Changes to federal banking regulations meant the debt-to-income ratio changed for 2014. To get a qualified mortgage now, your debt, such as utilities, car payments, and proposed mortgage payment, cannot be more than 43 percent of your income. If you make $2,000 a month before taxes, your monthly debt should not exceed $860. If you come in too high, consider selling unnecessary household items and paying off some debt or take a second job to raise your income.
Have Your Documentation Ready
During the home loan application process, your lender needs some paperwork. This typically includes your last pay stub if you are employed. If you are self-employed, be prepared to show your tax returns for the past two or three years. You will be asked for account numbers to any bank accounts you own and for credit cards on which you still owe money.
Consider How Much You Can Really Afford
While this ties in partially with the debt-to-income ratio, you also need to go to your lender and show that you are not shopping outside of your means. Be prepared to show how much you are paying for the down payment on your new house, 20 percent is ideal if you want to save money and avoid private mortgage insurance (PMI).
While a realtor may push you to view larger, pricier homes, don't forget that in addition to the price of the house, you must pay closing costs, realtor fees, and any immediate upgrades that are necessary in your new home. You may work out a deal with the seller to get them to cover urgent repairs like a new furnace or roof, but new furniture, repainting, and items that make the house more appealing to you are going to be your expense. When you add in these costs, finding a home in the lower end of your price range is often smarter.
Be Prepared to Shop Around
You're not limited to finding banks locally. Many online home loan companies offer better rates. Shop around for the best deal and you'll save plenty of money by taking that important step towards securing a mortgage for your new home.
