Once you decide that it’s time to buy a home, the next step in the process is securing a preapproval from a mortgage lender.
With this in hand, you’ll better understand:
- How much you can borrow
- The interest rate you qualify for
- A monthly payment range
All of these details are subject to change, but at the very least you’ll have a good jumping-off point.
What are the factors to consider when applying for a mortgage?
Understanding the factors that lenders consider will help you position yourself to qualify for a mortgage approval. Here are the five areas that deserve the most attention:
- Income: The more money you earn, the more money you can borrow. Also, lenders will verify that you have a steady employment history.
- Credit score and history: A good or excellent credit score will help you obtain a mortgage.
- Debt to income ratio: Generally, a front-end ratio of no more than 28 percent is desired.
- Down payment: You greatly improve your odds of approval if you have a down payment of at least 20 percent.
- Savings: Money in a savings account can be used to pay your mortgage in the event of an unforeseen situation, such as a job loss or major illness.
Since this is what lenders consider, you should take steps to improve your finances in these key areas.
Minimum loan requirements regardless of loan type
Most people applying for a loan are interested in a conventional purchase.
However, regardless of type, there are minimum loan requirements to keep in mind:
- Credit score: 620
- Down payment: Three percent
- Loan limits: $647,200 (in most parts of the United States)
These minimum requirements aren’t set in stone and will certainly vary by lender, but they make for a helpful reference point as you apply for your home loan.
What is a mortgage preapproval?
A mortgage preapproval is as close as you can get to securing a loan without having a purchase contract in place.
Complete an application—albeit not as in-depth as a regular mortgage application—and a lender will review key financial information and confirm your creditworthiness.
If you’re preapproved for a mortgage, you’ll receive a preapproval letter via email and/or mail. Sellers are more inclined to sign a contract with a buyer who is preapproved, as it’s one less thing that can go wrong.
Most preapprovals are good for 90 days but double-check this with your lender. If your preapproval letter expires, you’ll need to go through the application process again.
Steps to take to prepare for a home loan application
As excited as you may be to apply for a mortgage and buy a home, you don’t want to get ahead of yourself. Doing so can cause you trouble down the road. There are steps you can take to prepare before applying.
1. Improve your credit score
Improving your credit score is one of the best ways to qualify for a home loan.
Additionally, a higher credit score can result in a lower interest rate. And with that, your monthly payment drops along with the amount of money you spend over the life of your loan.
Improving your credit score can be as simple as consolidating and paying down debts, increasing your credit limit, using and paying off your credit card each month, and checking your credit report for errors.
2. Save for a down payment
With some lenders, you can secure a mortgage with a down payment of just three percent. However, if you shoot for 20 percent or more, you’re in a much better spot. Here’s why:
- The more you put down, the lower your monthly payment.
- 20 percent or more allows you to avoid the added cost of private mortgage insurance (PMI).
- You gain a good portion of equity in your home from day one, which reduces the likelihood of your loan being “underwater” in the future.
If you don’t have enough money saved for a down payment, crunch the numbers based on what you do have. This will help you decide if it’s okay to proceed or best to hold off until you save more.
3. Gather documentation
Your lender needs a variety of documents to process your mortgage application. Collecting these upfront will help save you time later in the process. Start with these documents:
- Tax returns
- Proof of income
- Bank and retirement account statements
- Investment account statements
- Gift letters
- Rental history
- Photo ID
Tip: Ask your lender for any specifics related to each type of document. For example, they may request tax returns for the past two years and bank account statements for the past 12 months.
4. Choose a location
Once you’re serious about buying a home, it’s time to narrow your location choices. It’s best to choose two or three areas in your budget.
To do so, answer questions such as:
- Are you comfortable in the area in which you currently live?
- What’s most important to you in the area where you’re buying a home?
- How safe is the area?
- What are the school districts like in the area?
- What’s the crime rate?
Once you answer these questions, research your choices and learn more about the homes for sale in each area. You’ll either find that you’re on the right path or that you need to reconsider one or more of your locations.
How first time homebuyers can qualify for a home loan
At AAA Banking, we’re committed to helping our customers secure a mortgage with competitive terms and conditions.
If you’re ready to get started, complete an application online or contact one of our loan officers via phone at (844) 897-2265.
We’re happy to answer your questions and walk you through every step of the process. It’s our goal to make the mortgage process easy and stress-free.
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