Becoming a homeowner is a dream for many Americans. After years of renting, everyone wants to have a place on their own. However, even when you find the perfect property, the market is competitive and it isn’t easy to get approved for financing. Getting pre-approved for a loan is the best thing you can do to get an upper hand.
Ever since the Great Recession that happened during 2008-2009, getting approved for a loan isn’t an easy task. Sometimes even when you’ve made a deal with the seller, the bank will deny your financing and the deal will fail. This is why it’s always a good idea to get pre-approved for a loan. If this is your plan, below are some things that you need to consider.
Your Monthly Income
The first thing that you need to do when you want to get pre-approved for a loan is to calculate and bring proof of your monthly income and debt payments. You’ll need at least two weeks of pay stubs to your lender. This becomes a little bit more complicated if you are self-employed or if your income varies. Some paperwork that might help you is copies of your tax returns. You’ll probably have to provide at least two of those. The lender might count only the lower number, so be vary of that.
Calculating your monthly income is important for your lender, as this will determine the size of the loan that they think you could pay back. If you already have large monthly debt payments, such as car or student loans, they might limit the size of the mortgage approval you can get. This is why you should always try to repay any debt you might have, or at least don’t take any new loan payment prior to asking your lender for a loan.
Your Employment History
Lenders will try to look for people with perfect employment history, especially when working with borrowers who want to get pre-approved for a loan. Expect the bank or any other private lender to give your employer a call to verify your salary – and employment itself. This is especially true if you have recently changed job positions. If you are self-employed, some other additional paperwork concerning your business will be necessary, such as the stability of income, the location and nature of your business and the ability to continue providing income for years to come.
Your Credit Score
Before getting pre-approved for the loan, you must get your credit score as high as possible. First, verify that there are no errors on the obtained report. There also shouldn’t be any missed payments or other derogatory items. If you are trying to find a house with an agent, it might take you months before you find the home that suits your needs. If this worries you, there are services that provide regular credit report monitoring and they usually aren’t expensive.
Keep in mind that your FICO score should be at least 680. The best thing would be if it’s above 700. Anything lower than that and you most likely won’t get pre-approved for a loan. If your credit score is near the bottom limit, you might end up paying high monthly payments.
If your score is bellow 680, there are several loan options that still remain, such as an FHA loan. However, these loans usually come with higher interest rate and other additional costs.
To ensure that your credit score is as high as possible, avoid applying for any new credit months prior to your mortgage application. If you end up piling up new credits, banks won’t like that. Even the smallest of credits can end up in you being refused!
Determine Your Budget
Before even trying to apply for a loan, determine the budget you are prepared to give for your new home. You have to know how much you can afford, but also how much you are comfortable paying. Another good idea is to always aim for houses that are a bit cheaper than your upper limit, as you might always end up having to bid for a property that you like.
Our suggestion is that your total monthly payment for your future house shouldn’t be more than 35% of your monthly income. Of course, it is difficult to equate this monthly payment to a house that is sold at a fix price. You can always hire an accountant or some other professional to help you with your calculations.
Determine the Size of a Down Payment
The down payment is the amount that you’ll have to pay when you close on the sale of your new property. Most lenders will require the down payment of 20% to 10%, but some lenders can agree on a lower down payments. This is the case of the before mentioned FHA or VA loans.
Our advice is to always put 20% as a down payment so you can avoid private mortgage insurance, which serves as a protection of your lender in case of a foreclosure. Either way, determine how much you are prepared to pay up front. Don’t agree for more than you think is necessary, but keep in mind that the more you pay beforehand, the less you will pay later and smaller the interest rates will be. This is why it’s important to know your limits when applying to get pre-approved for a loan.
The Bottom Line
Sometimes, even when you think you’ve done everything right, you might not get pre-approved for a loan. This shouldn’t discourage you. You can always try applying again, or contact another lender. It is always a smart option to contact your desired lender before applying, to help yourself get everything right the first time.