Buying a house isn’t as simple as people make it out to be. While members of the upper-class can waltz into any bank they please and get pre-approved for a loan virtually on the spot – those on the lower rungs of the middle class don’t have banks throwing loan offers at them.
If you’re a first-time homebuyer with a less than perfect financial past, you’ll have to plan ahead. Here are some things you can do to increase your chances of getting approved for a home loan:
1. Hold a Steady Job
If you’re planning to buy a house in the near future, you need to do everything you can to maintain a steady paycheck. It’s generally advisable not to switch jobs, unless you’re expecting a pay increase. Stability is what lenders want to see.
If you’re an independent contractor, you’ll need at least two years of tax returns to justify your income. Otherwise, it’s difficult to qualify for a conventional loan.
2. Avoid Big Purchases
Try not to make any big purchases in the months leading up to your mortgage application (or in between the time you seek approval and you actually purchase a house). This can put a dent in your finances and make lenders second guess your credibility.
3. Boost Your Credit Score
Your credit score plays a major role in determining whether you qualify for a loan, as well as what rate you qualify for. Go ahead and pull your credit report and check your score. This does two things. First off, it gives you an idea of where you stand. Secondly, it provides an opportunity to spot negative information that may not be accurate.
“It’s estimated that 20% of credit reports contain errors, and spotting and correcting a mistake on yours could help your score improve, thereby increasing your chances of mortgage approval,” personal finance blogger Maurie Backman writes. “You’re entitled to a free copy of your credit report every year from each of the three major reporting bureaus – Equifax, Experian, and TransUnion – so dig up the data those folks have on file for you, and make sure it’s accurate.”
4. Save up a Sizeable Down Payment
Cash talks. The more of it you have, the less you have to borrow from the bank. And as your down payment amount goes up, your loan becomes less risky to the lender.
Now’s the time to start saving. If you’re struggling to save up for a down payment on a house, try the following:
- Pay down bad debt
- Implement a strict monthly budget
- Try to increase your income
Doing all three of these things simultaneously will allow you to jumpstart your efforts and gain momentum towards stashing away a large down payment.
5. Lower Your Debt-to-Income Ratio
“In addition to your credit score, your debt-to-income (DTI) ratio is an important part of your overall financial health. Calculating your DTI may help you determine how comfortable you are with your current debt, and also decide whether applying for credit is the right choice for you,” Wells Fargo explains.
You can calculate your DTI by taking your monthly debt payments and dividing that total by your pre-tax income. The result is a percentage, which describes how much of your top-line income is going towards existing debt.
Lenders would like to see a DTI that’s smaller than 36 percent. But for the best chances of approval, you should try to get it down to 25 percent or less. You can do this by paying off loans ahead of schedule, negotiating a higher salary, adding a side income, and/or refinancing high-interest debt to a lower rate (which subsequently lowers the monthly payment).
Don’t Bite Off More Than You Can Chew
Once you get a loan offer, you have to keep your wits about you. Just because you get approved for, say, a $200,000 home loan, doesn’t mean you have to use all of that money. There’s nothing stopping you from only taking on $150,000 in mortgage debt. In fact, it may be the smarter move.
Buying a house is exciting and fun, but don’t let it suppress you for years to come. There’s no sense in owning a nice house if it prevents you from doing other things like buying furniture, taking vacations, and giving your kids good Christmases and birthdays. Use discretion and make a wise decision that you’ll be happy with in the future.