A home loan, for most, is the largest financial investment in their lives. People spend a large part of their life paying off their home. It is important to understand the process of applying for a home loan and have the proper financial housekeeping taken care of before you begin the process. This article will discuss the items that the lender will be interested in before approving your home loan application.
We will start with credit related items that you will need and how to make them look good before you apply for the home loan. The first item you will want to get is your credit report. Be sure that you get a report from all three major credit bureaus. Check over the information and make sure that there are no errors in the report. If there are discrepancies in the report it could cause your rates to be much higher than they should. Forty percent of credit reports are faulty; so be sure that you check over them. Not checking over them can cause you to spend money that doesn’t need to be spent.
You will also want to check on your credit standing. Make sure that you have little or no credit card balance and be sure that you take care of any outstanding bills before you apply for the mortgage. If the lender sees that you have debt piling up they will be hesitant to loan you money. It would be like a friend that has borrowed money from people and failed to pay them back, asking you for money. Would you do give them the money? Probably not.
The number of credit accounts that a borrower has can also affect the loan that you get. Make sure that you do not open or close any accounts prior to applying for the loan. When you are constantly making changes to credit accounts it could look like you are trying to hide some bad financial decisions from the lender. These actions will look suspicious to the lender and could cause them to deny a loan application.
Now that all of the credit related items are accounted for you are going to want to look into the financial process that is part of the mortgage plan. These financial parts of the loan application process include income, interest, funds, and price ranges.
A steady source of income is also a must when applying for a home loan. Banks look for an income that can support the payments of the mortgage. If you are making $30,000 a year and are looking for a $900,000 loan, that is more than likely out of the ball park. A loan of $100,000 is a more realistic option. Lenders will be a lot more likely to give you a mortgage if you are clearly able to afford the payments.
You must also consider interest rates when applying for a home loan. A higher interest rate will mean you are being charged more per dollar borrowed per year than if the interest rate was lower. A lender’s interest rates could rise before the loan application is reviewed and approved. This means that you could apply while the interest rate is 4.297%, but by the time you are approved it could rise up to 4.341%. This change will lead to larger payments and an all around larger amount of money spent that could be saved. It is really impossible to predict changes in the interest rate. If you find a favorable rate and wish to maintain that rate throughout the entire review process, you can pay a lock in fee which will save the favorable rate.
You must also prove to the lender that you have the money to cover closing costs and other costs that will come with the purchasing process. Be sure that you do not spend a large amount of money, that could deplete the amount of money you have on hand, prior to applying for the loan. You will want to have money set aside on top of the down payment that will cover these costs.
Make sure that the house that you have your eyes on is in your price range. You must check to make sure that you will be able to afford the payments on the mortgage. You will have to figure out your debt to income ratio (DTI) which is the percentage of your income that is put toward paying off debts. If the percentage put towards paying off debts is less than the payments of your mortgage your loan application will be denied.
Last, but not least, do some research on the lender to see how many applications they approve, and how many they deny. Find out the total percentage of applications that are approved by the lenders. If the total percentage of applications that are approved is less than fifty percent try to shop around and find a lender that has an approval rate higher than fifty percent.