Before researching neighborhoods online or attending that first open house, prospective home buyers should prepare to apply for a mortgage. These four tips will help streamline the home loan process and improve the chances of mortgage approval.
Obtain Credit Scores
Lenders look at a three-digit number known as a FICO score to determine whether a buyer is likely to repay a home loan. The higher this number (on a scale of 350 to 800), the better mortgage terms and interest rates the person can access. The minimum credit score for a mortgage approval is 680 for a traditional loan or 620 for a federally-backed FHA loan. Those who fall below this range should work on credit repair before applying for a mortgage.
Make a Budget
In general, a person’s total debt, including the projected mortgage payment, must be less than 41 percent of their income to qualify for a home loan. Ideally, this number, called the debt to income ratio (DTI), should be below 36 percent. Buyers with a higher DTI should pay down debt before applying for a mortgage.
Save a Down Payment
Having money to put down on the loan is an important part of the mortgage approval process. With an FHA loan, the buyer needs to save only 3.5 percent of the home’s purchase price. Traditional loans often require a 10 to 20 percent down payment. Buyers also need money for closing costs, which can add up to 3 to 5 percent of the total loan amount. Putting down 20 percent lets borrowers avoid private mortgage insurance, which can be a significant monthly cost.
Mortgage lenders require significant paperwork to ensure that buyers can afford to repay the loan. Borrowers should gather personal and financial information that includes tax statements, paycheck stubs, bank statements, proof of employment such as a W-2 form, information about assets and debts, and other details that provide a complete picture of creditworthiness.
First-Time Home Buying
While these tips apply to everyone applying for a mortgage, first-time buyers may face some obstacles. For example, the lack of a previous mortgage may impact the applicant’s FICO credit score, as the length of time that a line of credit is open can increase the credit score. In addition, most first-time buyers don’t have the profit from the sale of their previous home to apply to either the new home’s mortgage or down payment. However, first-time home buyers are more likely to qualify for an FHA loan and its smaller down payment.
Buyers who are ready to shop for a Nashville home can receive personalized, knowledgeable service from the team at HND Realty LLC. Contact us online or call 615-297-7711 to discuss the next steps with our agents.