It’s no secret that today’s home buying market is competitive. The median home price in the United States is up to $280,000, and this can be even more expensive depending on your state. Because owning a home is such a key part of the American Dream, it’s no wonder Americans are stretching the limits of their finances to qualify for a mortgage.
Whether you’re a first-time homebuyer or looking to upgrade your space, qualifying for a home isn’t always straightforward. Though the U.S. economy is currently improving, the number of mortgages is actually in decline. Mortgage lenders need to feel confident you’re a safe investment. Follow these tips to learn how to qualify for a mortgage.
1. Build Your Down Payment
The best way to get the loan rate you’re looking for is to offer a 20% down payment. While not all mortgages require this much, especially for first-time buyers, you’re opening your finances to closer scrutiny by putting less down. The less money you’ve personally invested in your home, the less you have to lose by walking away.
Another thing to consider is that offering a down payment of under 20% will require you to purchase private mortgage insurance (PMI). This is how the lender protects themselves from losses. Unless you qualify for a government insured loan (VA, USDA, FHA), it’s best to save for your down payment.
2. Know Your Credit Score
It only takes a few minutes to pull your free credit report, and this history is essential to the loan process. A low credit score will stop a mortgage application in its tracks so your score will direct you to any next steps. The Home Loan Learning Center reports that most lenders require a minimum score of 680 or 620 for FHA loans. Having several missed payments, lateness, or any derogatory credit information will hurt your approval chances.
3. Pay Down Debt
While you don’t need a zero balance on all of your credit cards to start a mortgage application, you do need a healthy debt-to-income ratio. If you have a high debt ratio, lenders see this as being unable to afford an additional monthly payment. If you’re struggling to pay off debt, especially credit card debt, it’s best to lower your debt-to-income ratio before you apply for a loan.
This also isn’t the time to take on any new debt. Lenders will even re-check your credit before closing on your loan, so stay away from any big purchases. From financing a new car to opening a new credit card, it’s best to hold off until you’ve closed on your loan.
4. Don’t Leave Your Job
Staying with the same employer during the loan process is vital. Your employment status one of the biggest factors of your application, so any changes to income can stop the process outright. Lenders want to see stability usually as far back as 24 months. Steer clear of gaps in employment or any negative changes to your pay. No matter your future plans, avoid any significant changes to your employment situation while you’re qualifying for a home.
5. Budget Wisely
We all want to keep up with the Joneses, but those luxury homes come with luxury price tags. Know what you can realistically afford, keeping in mind that your mortgage payment shouldn’t be more than one-third of your monthly income.
Even if you can get pre-approved for a home that’s outside of your price range, that doesn’t mean this is a smart choice financially. You know your expenses best, so budget for your home wisely. You don’t want to find yourself facing payment shock when you get hit with your first mortgage payment. Make sure you can justify your spending before agreeing to a long-term mortgage.
If you don’t qualify for a home right now, don’t be discouraged. There are many ways to improve your credit and financial situation so you can afford your dream home in the future. Buying a home is a major decision. You need a clear plan to keep your wallet and credit in check until your loan is approved.