Buying a house can be complicated with all the factors you have to consider. In addition to finding a home that checks off all your boxes, it’s important that you understand what the lending process is like before you get started. Knowing the documentation you’ll need to present and the criteria you will have to meet will help the process go more smoothly.
Understanding what lenders look at to determine your eligibility is also crucial. There are many things you can do prior to applying that will improve your chances of getting approved. For example, paying down debts now might make it easier to get a home loan in the future. Below, learn about steps you can take before submitting a home loan application so you can streamline the process.
1. Establish a Strong Payment History
When you apply for financing, lenders will look at a wide range of factors to determine your eligibility. These details determine if you are qualified for certain rates or for getting a loan at all. One of the best ways to set yourself up for success is to make sure your credit report shows a history of paying bills on time. If you are reliable in paying your other debits, a lender will be more likely to approve your application and offer better rates.
2. Look at Your Credit Report
Your credit report shows more than just your payment history on bills and other debts. Because your credit report is an important factor in getting approved for a loan, it is helpful that you know what your report actually says about your finances before applying for any loans. There are several websites that allow you to access one or all of your credit reports for free. Keep in mind that everyone is also entitled to one free annual credit report from the Federal Trade Commission (FTC) as well.
3. Understand Debt-to-Income Ratios
Along with your credit report, most lenders use a similar formula to determine how much you can borrow. This formula calculates how your current debt measures up to your income. In general, you will only be approved for a mortgage that is no more than about 28 percent of your income. Furthermore, your total debt payments, which can include your mortgage, car loans and other similar expenses, cannot usually exceed 36 percent of your total income.
4. Be Careful About Job Changes
Lenders like to see that you have a stable job when applying for a loan, since this usually means you’ll be more reliable at paying your mortgage. If you have gaps in your recent employment history or change jobs frequently, a lender might determine that your income is unreliable. In most cases, mortgage companies will want to see about two years of employment history to get a full picture of your income over time.
5. Think Twice Before Opening or Closing Accounts
The amount of credit accounts you have directly affects your credit score. When you’re preparing to buy a home, it’s usually not a good idea to open too many new credit accounts at once, since each instance will result in a new credit inquiry being entered on your report. At the same time, you may want to avoid closing lines of credit when you are preparing to get a loan, as this can reduce your amount of available credit.
6. Consider All of Your Loan Options
There are many different types of home loans to choose from, and not all of them will work for your situation. Most mortgages are fixed-rate 15- or 30-year loans, while some have adjustable rates. Other less common loans include interest-only or negative amortization loans. Generally speaking, the safest type of mortgage for most people is a fixed-rate 30-year loan, but what works best for you might differ depending on your finances and future goals.
7. Spend Carefully Before Applying for a Loan
Blowing your savings account or making large purchases before applying for a loan is not usually a good idea. You never want to rack up unnecessary debts right before submitting an application or making a down payment. Lenders usually look carefully at your spending in recent months, and may see large purchases as a red flag. At the same time, you will want to avoid spending unnecessarily during the loan approval process due, to the fact that lenders can keep an eye on your spending until your loan is officially approved.
8. Gather the Necessary Mortgage Documentation
Even if everything else is in order before you apply, you don’t want to get tripped up by not having the right documentation on hand for your application. Most lenders will want to see the same types of information with your application, such as:
- Pay stubs from the past month or two.
- Two years of income statements (W-2s) and tax returns.
- Two months of bank statements.
- Proof of identity, including your photo ID and Social Security number (SSN).
- Statements about any of your investments.