Congratulations! You’ve decided to get a home loan. That’s a very big step towards achieving the American Dream. For most Americans, buying a home is one of the biggest financial investments they’ll ever make. Therefore, making such an investment requires a lot of thought and careful analysis.
For instance, you need to think hard about how much you can afford, not just in monthly mortgage payments, but also in property taxes, homeowner’s insurance, HOA fees, repairs and maintenance, interior design and furnishing, utilities, landscaping, home warranty, and more. Those are just some of the expenses that come with owning a home that you wouldn’t worry about if you are a renter.
You also need to think about the neighborhood in which you want to live, the value of homes in that neighborhood, the schools, parks, cultural centers, the safety of the neighborhood, and so forth.
As you can see, buying a home requires a lot of thought. But we’re going to help make the process much easier by detailing, in this guide, the best way to get approved for a home mortgage loan.
Income Is Key: What’s Your Income?
Having an 800 credit score doesn’t automatically qualify you for a home loan. Yes, 800 is an excellent credit score, and you’re probably disappointed that even an excellent credit score cannot get you approved for a home loan. But before you start pulling your hair out, let me explain.
Credit scores are not an indication of how much money you make. It just an indicator that you pay your bills.
It’s possible for someone making only $24,000 a year to have an 800 credit score, but it doesn’t mean they can afford a $1,500 monthly mortgage.
If your income isn’t adequate enough to pay your mortgage, the bank is going to deny your mortgage loan application–no matter what your credit score is.
How Much “House” Can You Afford?
Before you walk into any mortgage lender’s office, you need to have a realistic conversation with yourself about how much monthly mortgage payment you can afford.
If you don’t do that, your lender will do it for you, and most likely deny your loan application.
Most lenders would prefer your monthly salary to be at least three times your monthly mortgage payment. That is, if your mortgage payment is going to be $1,500 every month, you should have a monthly take-home pay of at least $4,500.
If you don’t have an income of at least three times your prospective mortgage payment, then you need to work on increasing your income.
A lender may consider your application if you have a low debt-to-income ration, but ideally, you need to make significantly more than your mortgage payment.
[READ: 10 Best Budget Apps To Manage Your Finances]Ways To Increase Your Income
If you are an employee, as most people in America are, you have a few options to increase your salary:
- Ask for a raise or a promotion– I know it’s not as easy as it sounds but if you don’t try you’ll never know. Make a list of all your responsibilities, what you do, how you add value to the company and then take your shot with the boss.
- Get a part-time or second job – According to the US Census, about 13 million Americans have more than one job. If getting a second job is going to help you make ends meet, or at least get approved for a mortgage loan, then do it. Flexjobs is an amazing place to find second jobs, part-time jobs, online jobs, and work-from-home jobs.
- Switch Careers – It’s never too late to switch careers. Some careers require only three to six months of training. For example, Web Development requires no more than six months of training — mostly from the comfort of your home. After your training, you’ll be able to make an average of $74,742, according to ZipRecruiter.com. You can get free and inexpensive training on Coursera.org, Edx.org or Udacity.com
Once you have your income in order, the next important thing is your credit score.
[READ: Frustrated About Your Bills? Here’s How You Can Make Some Extra Money]Get Your Credit Score In Order
Let’s say you make a sizeable income but you have poor credit scores. Well, your huge income alone is not going to get you approved for a mortgage loan. In fact, a huge income with a poor credit score will most likely get your mortgage loan application denied.
You need to have a good income plus a good credit score. A poor credit score tells lenders that you are financially irresponsible. It says you don’t pay your bills. Being able to pay your bills, especially your mortgage bills is fundamental to getting a mortgage loan.
[READ: Get Your Free Credit Score With Chase Credit Journey]How To Fix Your Credit
Let’s assume you have bad credit or no credit at all. Well, all is not lost, you can repair or establish credit. Here’s how:
How To Establish Credit For A Mortgage Loan
There are several ways to establish credit. Below are a few of the more popular ways:
Get a self-lender loan – Most people over 18 can qualify for a self-lender loan. Here’s how it works:
- Apply for a credit-builder account — here
- Pay off your Credit Builder Account in the specified amount of time (12 months, 18 months, or 24 months).
- Each on-time monthly payment builds credit history and adds to your savings because your payment gets reported to the three credit bureaus.
- Once you’ve paid off your Credit Builder Account, the money is yours (minus fees and interest). Simple and easy.
Get a Secured Credit Card — With a secured credit card, you’ll have to deposit an amount — equivalent to the amount of credit you want — with the credit card company.
For example, if you want a $1000 dollar credit limit, you’ll deposit $1000 with the credit card company. Then you’ll receive your credit card and use it as you would a normal credit card. Every time you make a payment on your credit card, it gets reported to the credit bureaus. That’s how you build credit using a secured credit card.
[READ: This Guy Increased His Credit Scores By 84 Points In One Month –Here’s What He Did]How To Repair Your Credit For A Mortgage Loan
If you have credit but destroyed it over the years, don’t worry, you can still make a comeback. Here’s what you need to do.
- Get copies of your credit report from all three major credit bureaus.
- Take inventory of exactly how much you owe and to whom.
- Dispute the inaccurate amounts and settle for pennies on a dollar with your legitimate creditors or debt collectors.
- Apply for secure credit cards and credit builder loans.
- Pay your bills religiously this time around — shoot for zero balance at the end of every month if you can.
- Watch your credit grow over a period of six to twelve months.
If you have insurmountable financial issues, bankruptcy may be the way out for you. But in that case, you should contact your financial advisor or a bankruptcy lawyer to resolve the issue.
Okay, now that we have your income and credit score on track, we have to move to the next step: Down payment.
[READ: DIY Credit Repair Hacks – Step by Step Process To Repair Your Credit]Save For Your Down Payment
Now that you’ve established or repaired your credit, and you’ve increased your income, the next step is to save money for a down payment on your mortgage loan.
Most lenders will request a 20% down payment on your loan — that’s about $40,000 on a $200,000 loan.
Having a great credit score, a great income, and your 20% down payment will put you in the good graces of your creditor. You will then be rewarded with a great interest rate on your loan. But not many people have $40,000 laying around. So what happens if you don’t have a 20% down payment?
What Happens If You Don’t Have A 20% Down Payment For Your Mortgage?
If you can’t come up with a 20% down payment, your lender may see you as a risky borrower, and either deny your loan application or ask you to get a PMI (private mortgage insurance).
A PMI will cost you anywhere between 0.5 to 1% APR on your entire mortgage loan. This is an amount you’ll have to pay in addition to your monthly mortgage payment.
What To Do If You Don’t Have A 20% Down Payment For Your Mortgage
If you don’t have your 20% down payment, you should check to see if you qualify for an FHA (Federal Housing Administration) loan. This loan is for people with credit scores of 580 or higher and down payments as low as 3.5%.
You can also check for First Time Home Buyers Assistance programs in your state. They’ll have resources to help you.
[READ: 22 Ways To Cut Cost, Save Money And Make Your Budget Work]Avoid New Debt After You Get Pre-qualified
Now that you’ve taken all the steps to increase your chances of qualifying for a mortgage loan, here’s one mistake you shouldn’t make: acquire new debt.
The mistake many people make after they pre-qualify for a mortgage loan is to go on a debt-financed shopping spree — don’t do that.
Getting prequalified doesn’t mean you are guaranteed a mortgage loan — not if your credit score and debt to income ratio change significantly before your loan is finalized.
Your lender will check all your financial details once more just before they finalize your loan. To avoid getting denied, put the brakes on acquiring new debt and messing up your credit score before you finalize your loan.
Final Thoughts – Getting Approve For A Mortgage Home Loan
Buying a home is perhaps the biggest investment you’ll ever make, so make it with deep thought and careful analysis.
Be careful to check with your state to see if there are programs to help first time home buyers. The Department of Housing and Urban Development has a lot of resources for people wanting to purchase a home. Check their website.
Finally, though this post is written in chronological order, increasing your credit score, increasing your income, and saving for a down payment can be done simultaneously. Make sure you’re single-mindedly focused on your goal and you will achieve it.
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