Purchasing a home is one of the most important financial investments you will ever make. Each payment on your mortgage will bring you one step closer to owning your home, rather than renting, where your payments end up in your landlord’s pocket.
However, the home-buying process can be daunting, especially when it comes to securing a home loan. Understanding how to get approved for a home loan and the benefits of pre-approval, will help you shop with confidence so you can afford the home of your dreams.
Mortgages can cover hundreds of thousands of dollars and are often paid over 15 to 30 years. The mortgage application allows lenders to verify that you have the financial means to pay off the loan over its lifetime.
The 2008 housing crisis, caused by unsustainable lending practices, taught lenders to be more meticulous with their mortgage underwriting process. However, you can achieve a mortgage approval with careful financial planning. Below are some of our top tips to follow if you are applying for a home loan.
Check for Mortgage Prequalification
Pre-qualification is one of the first steps to take when starting your home-buying journey. With basic information like your credit history, income, debts, savings, and desired loan structure; an online calculator or a loan consultant can estimate whether you will be able to qualify for a loan.
Lenders do not verify the information given, nor do they guarantee an offer. However, knowing whether you pre-qualify is important in assessing your financial feasibility and can help you plan your future actions.
Clean Up Your Credit History
If you pre-qualify for a loan smaller than you had hoped for, or did not pre-qualify at all; you may want to review your credit report. You can receive one free credit report per year from each credit reporting agency. Additional access to your credit score can be obtained for a small fee.
Many lenders require a minimum credit score for conventional mortgage loans. Identity theft, mistakes, or omissions on your credit report can tank your credit score and hamper your chances of obtaining a mortgage approval. Catching these errors and disputing them can improve your credit score and home loan prospects.
You can also boost your credit score by:
- Paying your bills on time
- Reducing your debts
- Using only a small portion of your credit limit
Save Up for the Down Payment
One way to show lenders you are low-risk is to have money on hand for the down payment.
Depending on the lender , a minimum downpayment for a home loan can range between 3.5% and 10% of the home’s cost. However, your credit score will affect the downpayment required because credit scores are considered indicators of future financial responsibility. If you have a higher credit score, it’s likely that you can put down a lower payment. However, lenders may expect you to put down a larger down payment if you have a low credit score.
Paying more upfront can really help you save in the long run. If you put down 20% or more, you can avoid paying for private mortgage insurance (PMI). A larger down payment also means you will start with a smaller mortgage amount financed, leading to lower monthly payments.
Explore Loan Programs
Different home loans have different requirements for approval. If you find yourself unable to gain approval for a conventional home loan, you may want to consider other types of loans like the FHA, VA, or USDA loan. These loans are issued by banks, credit unions, or mortgage brokers just like conventional home loans; however, they are insured by government programs making them less risky to the lender.
Consider a Credit Union
Credit unions are not-for-profit, member-focused cooperatives that thrive on the success of their members. They are known for their low fees and interest rates. If you are uncertain about any part of the home loan approval process, a great place to find answers is at your local credit union, where you will receive personalized advice from friendly financial experts.
How to Get Pre Approved for a Mortgage
Unlike pre-qualification, pre-approval means a lender has verified the documents provided in your application and approved you for a specific loan offer. This comes with a pre-approval letter that is usually valid for 90 days.
Taking advantage of the mortgage pre-approval process has many benefits. These benefits include:
- Sheds light on credit score issues — You will be able to look at any issues with your credit score during the mortgage pre-approval process.
- Gives a budget to work with — It’s crushing to fall in love with a home and find out later, that you cannot afford it. With a home loan pre-approval, you can avoid this scenario by house hunting within your appropriate budget. Some realtors even require a pre-approval letter in hand before showing you homes, as it demonstrates that you are a serious buyer with a realistic budget.
- Accelerates negotiations — Once you discover your dream home, pre-approval gives you an edge above other interested buyers, as you can quickly give an offer within your pre-approved loan amount.
The Loan Application
Whether applying for pre-approval or approval, mortgage lenders will ask for proof of your income, assets, debt obligations, and credit score. Common documents include bank statements, pay stubs, W-2s and tax returns.
Finalizing Home Loan Approval
If you have been following along, you have:
- Checked your prequalification
- If needed, built up your financial health
- Researched the loan options to find the one that best fits you
- Consulted a local credit union
- Gained pre-approval for a mortgage
Throughout the process, avoid making major changes to your finances, like quitting your job, financing a new car, racking up credit card debt, or cosigning a loan. Your lender will reevaluate your credit just before closing, and these developments can cause even a preapproved loan to fall through.
All that is left is to find a house that feels like home! Order an inspection and appraisal of the property, and submit your loan for a final review. If all goes well, you will receive your loan, close the deal, and become a homeowner!
The content provided is intended for informational purposes. Mission Federal Credit Union disclaims any liability for decisions you make based on the information provided. References to any specific commercial products, processes, or services, or the use of any trade, firm, or corporation name in this article does not constitute endorsement, control or warranty by Mission Federal Credit Union.
Investopedia. Federal Housing Administration (FHA) Loan. https://www.investopedia.com/terms/f/fhaloan.asp
Investopedia. How Can I Avoid Paying Private Mortgage Insurance?. https://www.investopedia.com/ask/answers/071514/how-can-i-avoid-paying-private-mortgage-insurance-pmi.asp
USDA. Income Eligibility Action. https://eligibility.sc.egov.usda.gov/eligibility/incomeEligibilityAction.do?pageAction=state
Nerd Wallet. Get preapproved for a mortgage. https://www.nerdwallet.com/mortgages/mortgage-pre-approval
Nerd Wallet. The Credit Score Needed To Buy A Home. https://www.nerdwallet.com/blog/mortgages/whats-exact-credit-score-need-buy-home/
Nerd Wallet. How Much Down Payment is Required? https://www.nerdwallet.com/article/mortgages/payment-buy-home