by Jon Silver
Mortgage interest rates are still hovering near 4%, which makes this a very attractive time to buy a home. You should do everything you can to get into your new home now when costs are lower. To do so, try the excellent tips below to get approved for a home loan with fewer obstacles:
#1 Improve Your Credit
Your credit score is important to mortgage lenders. In the two years before you want to buy a home, you should be careful to responsibly manage your debts and bills. Always pay your bills on time and try to cut into the balances on your credit cards. If you are just making minimum payments, this is viewed negatively by many lenders.
Remember that improving your credit score by just 10 points can be the difference between a low rate and a much higher rate. Also, if you have any black marks on your credit in the last two years or so, this will increase your rate.
A past foreclosure or bankruptcy will not stop you from getting a loan, but it can delay the process.
Tip: The minimum credit score for a conventional, 20% down mortgage is approximately 640 to 680. With an FHA-backed mortgage, the minimum is 640.
Extra tip: Lenders usually like to see a debt to income ratio of 36% or lower. Do you measure up?
Another tip: The longer your credit history, the more likely you will be approved for a loan.
#2 Increase Your Down Payment
A 20% down payment is standard, but there are plenty of mortgages available with 5% down and as little as 3.5% down. However, if you want to have more equity in your property and be seen as a good risk, try to put down at least 10%.
Tip: Federal Housing Administration (FHA) loans are backed by the US government and you can get a loan with as little as 3.5% down at a low interest rate.
#3 Have a Solid Rental History
If you are buying your first home, you want to show that you have been paying your rent on time. You can ask your landlord for a statement that shows you have paid your rent on time for at least the last two years, ideally.
Tip: There are some services available now that will report on time rental payments to credit agencies. Check with your landlord if this service is available.
#4 Get Pre-Approved
Before you are looking for a home to buy, it is smart to get a mortgage pre-approval. That way, you know exactly how much you qualify for. Generally, you can qualify for a mortgage for a home that is three times more than your gross income.
#5 Increase Your Savings
You should not completely drain your savings to fund a down payment and closing costs for your mortgage. Lenders want to see that you have emergency reserves available.
Tip: Lenders like to see that you have at least three months' worth of living expenses.
#6 Factor in Closing Costs
You need more than a down payment and stable income to buy a home. You also need to pay closing costs, which are at least 3-5% of the cost of the home. There are some closing costs that you may be able to shop around for, but others are fixed.
Tip: There are some 'no closing costs' loans on the market that can save you money up front. But remember that the closing costs are most likely wrapped into the loan, or you are paying a slightly higher interest rate.
#7 Look at the Different Loans Available
A 30-year fixed rate mortgage is the standard, but it is not the best choice for everyone. An adjustable rate mortgage is not for everyone either. Everything depends upon your circumstances.
If you want to stay in the home for many years, a 30-year fixed rate mortgage pay work best. However, if you plan to move within five years, a 5-year adjustable rate mortgage could work for you.
#8 Do Not Take on New Debt
If you have had a mortgage loan approved and are about to close on the home, whatever you do, do not take on any new debt! Your lender will run your credit again just before closing to make sure that nothing has changed in your profile. This is not the time to take out a $50,000 car loan or to run up $15,000 on a credit card.
Getting a mortgage loan can be a stressful experience, and you want to make it go as smoothly as possible. If you follow the eight tips above, you will be much more likely to get approved for your loan.
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