In an era where renting is on the rise and buying is on the decline, applying for your first mortgage can seem intimidating. The application process is always a question mark, and it’s hard to know exactly what a lender is looking for. Thankfully, there are plenty of universal factors that can improve anyone’s chances of being approved. If you’re starting the process of home buying for the first time, read on for tips on how to qualify for a mortgage loan today.
What's in this article?
Credit scores range from 300 to 850, but you don’t need to be in the 800-club to get a mortgage. Personal finance blogger Eric Rosenberg of Personal Profitability said a score of 740 or higher is enough to get you the lowest interest rate.
You can check your credit report from all three credit bureaus, Experian, Equifax and TransUnion at annualcreditreport.com for free, but will need to pay extra to see your credit score. You can look at scores from each bureau once a year.
You may consider holding off on finding a house until your credit score reaches 740. You can increase your score by lowering your balance on all forms of credit, making on-time payments and not opening new lines of credit.
Let’s Get Your Loan Started
Even if you think you have a high credit score, it pays to check your credit report. You may find an incorrect mark on your report that can disqualify you for a low rate or an old collection that can now be removed from the report.
After the housing bubble burst in 2008, lenders began to tighten their practices. Large down payments were more common, and the buying process became generally more restrictive to first-time buyers.
Now the tide has shifted, and smaller down payments have once again become acceptable. For those just now learning the home buying lingo, a down payment is an amount of money you pay up front when you buy your home as an act of good faith to the lender.
In general, you should aim to make a large down payment. A 20% down payment will allow you to avoid paying private mortgage insurance, which lenders charge when you have low equity on your home. Plus, the bigger your down payment, the lower your monthly mortgage payments will be. You’ll also qualify for a lower interest rate.
But there are other options if you can’t afford or don’t want to put that much money down. You can get a Federal Housing Administration loan with only 3.5% down, and some banks will also offer 3% and 5% down. Veterans and those in rural areas can often find mortgages with no down payments required.
Decrease Your Other Debt Obligations
One of the biggest factors that lenders consider when deciding on your mortgage application is how much other debt you have. They want to see that you can afford to pay a mortgage on top of your other bills.
A good rule of thumb is to have no more than 28-44% of your gross monthly income going to other forms of debt. If your percentage exceeds that recommendation, you can try refinancing to get a lower monthly payment or landing a part-time job to pay off your debt.
Save Up for Emergencies
Lenders also want to see that you have enough cash in reserves to pay for any unexpected repairs your new home may need – all while still making your mortgage payments.
It’s a good idea to have between three to six month’s worth of expenses in an emergency fund, which you should store somewhere easily accessible, such as a savings account.