If you’ve been considering ditching the renting game and investing in some property of your own, you may be wondering how to go about getting a mortgage.
After the housing crisis a decade ago, lenders have become stricter with who they approve for a loan. Here’s what you need to know about getting approved for a mortgage loan.
Know Your Income and Monthly Debt Obligations
The first thing you need to do to prepare for a mortgage application is document your monthly income and all of your debt payments. You’ll be asked for two weeks of pay stubs by your lender to verify your income, so have those on hand.
If you’re self-employed or have more than one source of income, this process can be a little more complicated and take more time. You might have to show copies of a couple of past tax returns.
To get your mortgage approved, a lender needs to determine if you can afford the mortgage payment. If you have lots of large debt payments, such as car and student loan payments, this will limit the size of mortgage you’ll be approved for. If you can pay off these debts before you apply, you’ll be in a better position financially and more likely to be approved.
Check the Health of Your Credit
Before you apply for a mortgage you’ll need a copy of your credit history report and your most recent credit score. Verify that there aren’t any errors on the report or any negative marks such as late payments.
Your FICO credit score should be at least 680 and hopefully more than 700. If it’s less than that, you’ll need to find a qualified cosigner or wait until you can improve your credit score before getting a mortgage payment.
Resist the temptation to apply for new credit a couple of months before you apply for a mortgage. Lenders are suspicious if it looks like you’re trying to hurry and pile on new credit just before you apply.
Determine the Budget for Getting a Mortgage
Before meeting with a lender, take the time to determine how much house you can comfortably afford. A helpful rule of thumb is to take your full housing payment including all taxes and insurance and make sure that it isn’t more than 35% of your gross pay.
To be on the safe side while allowing for more financial wiggle room, aim for a housing payment of no more than 25% of your gross income.
Decide How Much You Need to Save for a down Payment
Once you’ve looked at your credit and determined your budget, it’s time to work toward your down payment. Today’s mortgage lenders generally require 10% minimum as a down payment unless you’re getting an FHA loan.
If you’re able to put 20% down and avoid expensive PMI (private mortgage insurance) payments.
Be aware that real estate agents will try to encourage you to consider buying more house than you can afford or than you need. You might be tempted yourself. But it’s better to stick with a payment that you know you can afford both in good financial times and in bad.
Check Out Additional Helpful Tips
While you’re learning these helpful hints toward loan approval and getting a mortgage, here are some great ideas for decorating that new house affordably once you’ve signed on the dotted line.
Be sure to check out our blog for other great money saving tips and coupons!