6 Steps to Qualifying For a Loan
Qualifying for a loan means finding a loan where the payments you make are within your affordability range, and the terms of the loan are appropriate for your situation.
What Can You Afford?
To start with, before investigating the loans that are out there, you want to see what you can realistically afford to pay each month for your mortgage. Let’s go through this step by step.
Step 1. What’s Your Down Payment?
The first step is to determine how much money you have for a down payment, since this reduces the amount you have to borrow. Take photocopies of your most recent brokerage and bank statements, and jot down how much cash you have saved for a down payment. Lenders typically do not like to see that you completely drain all of your savings for a down payment, so you may need to set aside money equal to 3-6 months of your household income as a reserve.
Step 2: Review Your Current Debts
When you apply for a loan, the first thing that your loan officer is going to ask you to do is provide documentation of your income and list your current debts and assets; they will also do a credit check to find out about your bill-paying history. To have the best credit possible during this process, it is great to keep these three things in mind:
• Steer Clear of Major Purchases
Avoid any major new purchases while shopping for a mortgage. Do not buy a car, a boat or any other expensive items. You want to have a low amount of debt in relation to your income, which is called debt-to-income ratio. You want this percentage to be as low as possible so that you can qualify for the loan amount you want.
• Avoid Changing Jobs
Don’t change jobs, unless it is going to be in the same field and for the same or more money than you are making now. Lenders like to see a stable employment history. Most lenders prefer that you are working at the same job for at least six months before you apply for a home loan. If you are self-employed, you need to have at least two years of stable job history, along with documentation of your income. If you are thinking about being self-employed do it after you buy your house, not before.
• Clean Up Your Credit
If your credit is less than perfect, one way to help you qualify for a better loan rate is to take six months and re-establish your credit. Pay all your bills on time or early, and pay off as many outstanding debts as you can. Each monthly payment that you make on time will be reported to the credit bureaus, and a history of timely payments for six months will look good to a mortgage lender.
Step 3: Calculate What You Can Comfortable Pay Monthly
Typically, lenders like to see that your mortgage payment is less than 28% of your gross monthly income. So if you earn $5,000 per month, the maximum mortgage payment would be $1,400. Historically, this has been the rule-of-thumb; because of the recent run-up in home prices, there have been lots of exceptions to this rule in the last few years. Your lender will have better knowledge of your local market conditions, so make sure to ask.
Step 4: Calculate What Mortgage You Can Afford
Ultimately, the down payment influences the mortgage rate and amount, and vice-versa. TotalMove offers a suite of calculators to help you crunch some of these numbers. Additionally, any lender or mortgage broker will be happy to work with you to explore your options. Today, there are many mortgage products to choose from, explore the various options from the traditional 30 year fixed to the multitude of adjustable loans. Each type has many different features and costs associated with them, so understand how they work and pick the best one for your situation.
Try our “How Much Home Can I Afford” calculator to see how easy it is to just put in the numbers, and come out with the mortgage, and therefore, the home cost that you can afford. Generally the down payment you came up with in step 1 should be 10 to 20 percent of the total purchase price in order to get the best interest rates. However, it is possible to have down payments as low as zero.
Step 5: Shop for the Best Mortgage
It does cost money to apply for a mortgage, as the bank will be putting in work on your behalf. You will pay a loan application fee as well as a credit check. Therefore, it pays to shop first using the Internet, to get a general feel for the kind of mortgage you want. Here are some key things to look for when shopping for a mortgage:
• The Term: how long before you have to pay it off. The longer you have to pay it off, generally, the lower the monthly payments, but the more total amount you will wind up paying.
• The Interest Rate: again, the lower the interest rate, the lower your payments. However, the interest rate is often affected by the percentage of down payment you have, and the length of the mortgage, as well as your credit rating. The better your credit, the lower your interest rate may be.
• Crunch the Numbers: use a calculator to evaluate the difference between adjustable and fixed rate mortgages. Check with someone who knows the market to help you decide.
• No-cost Mortgages: if you are short on cash, evaluate no-cost mortgages, which have a higher interest rate, but include all the closing costs.
Step 6: Do a Pre-qualification and Then Apply
You can ask a lender for pre-qualification, which allows them to see if you qualify without your having to pay for the formal loan application. This also allows you to do a little more shopping around before you apply. Once you have all the information in hand, pick the most compatible company to work with, and apply for your loan. Then, enjoy the process of buying your home, knowing you did your homework first.