Because a mortgage payment is a major expense for most homeowners, lenders take every precaution to make sure they’ll be repaid. Specific requirements vary among banks and loan programs, but a good income, a strong credit history and a sizable down payment are a few of the things that can help you qualify for a home loan. The sooner you start preparing, the better your shot at getting approved.
Lower your debt-to-income ratio. This ratio equals your total monthly debt payments -- including your new mortgage payment -- divided by your monthly income before taxes. To get a conventional loan, this ratio typically must be 36 percent or less. To reduce your ratio, you can increase your income or pay down debt. For example, if your debt-to-income ratio is at 37 percent, pay off a credit card or two to get it within qualifying range.
Get your credit report from each of the three reporting agencies -- Experian, Equifax and TransUnion -- and review them for inaccuracies. Federal law entitles you to one free report from each agency annually through AnnualCreditReport.com. If you find errors, contact the reporting agency to get them removed. Banks review your information from all three agencies with a fine-tooth comb, so you want to make sure everything’s correct.
Review and improve your credit scores. Each credit agency reports a separate score ranging from 300 to 850. You might pay a fee to see them, but it’s worth it to know where you stand. To boost your scores, you can pay down credit cards, make all your payments on time, avoid opening new accounts and avoid racking up new charges. While its possible to get a loan with a score in the 600s, your chances are much greater above 700.
Establish a stable job history. From a bank‘s perspective, if you get a steady paycheck, you’re more likely to pay your mortgage. The longer you’ve been at your job, the more reliable you appear. If you’ve been planning to give up your nine-to-five to start a new business, hold off until you get a home loan.
Save for a down payment if you’re buying a home. Because lenders want to avoid shouldering all the risk, they generally require you to pitch in. The amount required differs, but anything above 20 percent of the purchase price will increase your odds of a loan approval. For example, if you’re buying a $200,000 house, pull together at least $40,000 for a down payment.
Build cash reserves. Some lenders require you to have the equivalent of several month’s worth of mortgage payments stashed away after accounting for closing costs and your down payment. This ensures that you can make your payments if you suffer a financial setback. For example, if you have $25,000 in a money-market account, you’re more likely to get a loan than if you had only $5,000.
- Bankrate.com: How Much House Can You Buy?
- Federal Trade Commission: Consumer Information -- Free Credit Reports
- MyFico: Understanding Your FICO Score
- LendingTree: What Credit Score Do You Need to Get a Mortgage?
- Buying a Home: The Missing Manual; Nancy Conner
- Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan; David Reed