Qualifying for a home loan is not as easy as just walking into a bank. One of the strings attached to the low interest rates are the incredibly stringent lending requirements. The Consumer Financial Protection Bureau released a new set of Qualified Mortgage Standards that came into effect in January 2014, largely as a result of the housing market bubble bursting in 2008 (Mortgage rules, 2014).
The result is a more burdensome application process; however, this is a process that is intended to protect consumers from bad loans from banks and mortgage companies. Those interested in obtaining a loan should prepare for this increased scrutiny by taking a number of proactive steps in advance of approaching a mortgage lender.
Run Your Credit Report
Your credit report is an integral part of the loan decision process by the bank. Be sure to obtain your credit report from three credit bureaus and make sure it is accurate. Credit scores are one primary driver in determining the interest rate you will pay and whether a loan approval is even possible. Credit scores range from 300 (poor) to 850 (excellent). A person will usually need a minimum credit score of 620 to qualify for a mortgage, but 740 and above is a better target for the most favorable loan terms. If there are any delinquencies revealed by the credit report, resolve those issues immediately.
Potential home buyers should run their credit reports several months in advance of applying for a loan in order to resolve any problems.
The Down Payment
In especially hot real estate markets home buyers may find themselves in bidding wars. One of the best ways to secure a home loan and offer is to have a substantial down payment. Sellers are more confident accepting an offer that has a twenty percent or more as a down payment, because these deals are typically easier for banks to finance. Banks give much more favorable loan terms to those with larger down payments, as this reduces the lender’s risk. The more a home buyer has as a down payment, the lower the lender is leveraged. Banks feel more comfortable when buyers have significant equity in their homes, say twenty percent or more, at the beginning of the loan.
Saving for a large down payment also has the added benefit of making an otherwise unaffordable home affordable to a home buyer. For instance, if a person only qualifies for a $400,000 mortgage but falls in love with a $465,000 home, having a large savings to draw upon may enable this person to purchase the more costly home under the same loan terms.
Research Mortgage Programs
It may seem as though all banks are offering relatively comparable terms for mortgages, but there are nuances that a home buyer should take into consideration. For one, even the slightest differences in interest rates can make a big difference over the lifetime of the loan. A person may be tempted to apply for a loan with the bank where they already have a checking or savings account, but this may not be the most prudent decision. Shop for the best rate or consider using a mortgage broker who has access to many lenders and can do the shopping for you.
A number of first-time homebuyer programs exist that can make buying a home more affordable. Discover which programs you may qualify for before you apply for a traditional loan. There is one program called the Sapphire Program that provides a grant of 3% to 5% of the loan amount to purchase the home.
Determine Which Type of Financing is Best for Your Needs.
After investigating your credit score, it is now time to determine which loan program is best for your needs. Perhaps you have a small down payment. In this case, a Federal Housing Administration (FHA) loan might be your best path forward. FHA loans only require borrowers put down 3.5 percent as a down payment, but it also requires you to pay private mortgage insurance (PMI) over the lifetime of the loan unless the loan is refinanced after twenty percent of the loan is repaid. PMI can be the equivalent to several hundred of dollars each month, but it allows those with larger monthly incomes to be able to afford to purchase homes faster than if they were required to save a larger down payment.
Based upon a person’s financial circumstances, he or she must also determine whether to take a short- or long-term loan, such as a ten, fifteen, or thirty year mortgage. The benefit of a shorter-term loan is that a person pays less interest over the duration of the loan, but monthly payments are higher. Vice versa is true for longer-term loans. Anyone planning to refinance or sell their home in the next five to seven years may want to consider a variable-rate, as this often provides lower interest rates in the short term. Buyers who plan to own their home for a long time may prefer the certainty associated with a 30-year fixed-rate loan.
Get Pre-Approved for a Loan
One of the first steps in qualifying for a mortgage is getting pre-approved for a loan. A pre-approval is not the same as a loan commitment from a bank. Instead, it is a bank’s general analysis of your ability to afford a mortgage of a certain amount. This will help you look only at homes you can afford during your house hunt, because you will know what price points you should be considering. Having a pre-approval letter in hand is also beneficial when making an offer on a home, as the sellers will want to know that a potential homebuyer is serious and can afford the price they have offered.
Find Homes within Your Budget
Now that you know what you are pre-approved for, begin your home search in earnest. You may realize that the homes you have been browsing online are well outside of your price range. This may mean looking outside of a desired neighborhood or even putting the search on hold while establishing a larger down payment or improving your credit score.
Your Offer is Accepted.
If and when your offer to purchase a home is accepted, your will move from a pre-approval to loan commitment. Be prepared to have the most recent copies of pay stubs, tax returns, bank statements, and other financial records. You are basically starting the process all over again to submit to the lender for loan commitment.
If your loan is approved, the interest rate will be locked, the appraisal will be ordered, and eventually loan documents will be drawn and signed to buy your new home. It is a very involved process and make take thirty to forty-five days to complete from the time the offer is accepted. Qualifying for a mortgage might be more complicated than ever before, but with proper planning, buying a home is well worth the effort. Be sure to visit the Buyer and Sellers Club on The Power is Now website (www.thepowerisnow.com).
Your free membership will provide access to valuable resources as you begin your journey toward homeownership. If you would like to discusss your home buying needs, please go to https://ericfrazier.youcanbook.me/ to schedule an appointment with me. You have the power to change your life now because The Power Is Now.
Eric Lawrence Frazier MBA
President and CEO
FTC Issues Follow-Up Study on Credit Report Accuracy, Federal Trade Commission (21 January 2015). Retrieved 1 September 2015 from https://www.ftc.gov/news-events/press-releases/2015/01/ftc-issues-follow-study-credit-report-accuracy.
Mortgage rules, Consumer Financial Protection Bureau (2014). Retrieved 1 September 2015 from https://files.consumerfinance.gov/f/201312_cfpb_mortgagerules.pdf.