Buying a home is a major milestone in your life. Before you start the home search, it’s important to know where you stand and whether or not you’ll even qualify for a home loan. There’s no reason to waste your time or a realtor’s time searching for homes that are unrealistic for you. That said, there are a few ways to make sure you know exactly where you stand before you start looking. Get pre-approved for your perfect house by following these seven things to do before applying for a home loan.
- Check Out Your Finances
There’s so much more to your financial state than just the number in your bank account. Factors like credit card balances, student loans, private loans, direct deposits, and savings, all impact your credit score. It’s important to stay up-to-date on the condition of your credit, whether it’s good or bad, and it’s much easier than you might think!
There are plenty of apps and resources out there to check your credit score. Credit Karma is really one of the fastest and easiest ways to check out where you stand, and most banks and credit card companies provide a free FICO credit score check. These are fairly accurate ways to see where you stand, but not exactly the same thing your lender will look at. They likely look at your credit score and a few other factors to create their own special number.
One other thing to consider is that these apps aren’t updated live. The score online might be more a few days behind. So, if you just paid off a massive credit card balance, your credit score won’t immediately be impacted.
- Keep a Good Job
A home lender likes to see that you’re reliable and have a stable job and income. If you’ve just recently moved jobs or gotten a raise, it’s probably best that you wait a few months to reflect a secure change.
It’s also important to note that even when you get pre-approved for a loan, that doesn’t mean that you have received the loan. A lender can pull out at any time if they feel your financial stability has wavered. It’s in your best interest to keep everything – including your work life – pretty similar until you’ve moved into your new home.
- Start Saving
Home lenders like to know exactly how much money you have saved and what your assets are worth. Basically, they want to see a big ‘ole dollar sign over your head. This means that the more money you have in a savings account or stable investments, the better.
If you don’t have much money saved, you should probably wait six months or so and start racking up the dough. You definitely don’t need 20% for a down payment, (there are plenty of down payment assistance programs out there) but you do need enough money for some kind of down payment and closing costs. Your lender doesn’t want to have to bail you out and the best way to show financial responsibility is by prioritizing your savings.
- Locate Paperwork
There’s a ton of paperwork that goes into a loan application. You’ll need to collect two years’ worth of W2s, a few paycheck statements, and bank statements. Lenders also don’t like to see money just appear and disappear from your accounts. If you have a side business or are self-employed, collect all the paperwork necessary to show the income was taxed and that you have kept diligent track of any expenses.
- Pay off Debt
Believe it or not, there is a such thing as good debt. Lenders today understand that student loans take up a large portions of the nation’s debt-to-income ratios. They also think student loan debt shows value and a stable future. So, if you (like many others) have racked up some student loans in the past few years, don’t worry too much. Just be sure you’re on top of your payments. If you had to delay your payments for any reason, just be sure to have the paperwork on file for delayed employment, low salary, etc.
One thing lenders don’t like to see is a significant amount of credit card debt. In most cases, credit card debt signals financial instability and lack of responsibility. If you do have credit card debt, try to pay this off as much as possible before applying. Start with the cards with the highest interest rates and focus mainly on this for now. Even if you’re putting a little less into savings for a few months, it’s worth it.
- Don’t Make Late Payments
Regardless of how much money you’re putting towards your bills and your debt, it’s vitally important to make those payments on time. Lenders are responsible for the money they give you, so they want to be sure you’re responsible with your bills. If you have a late credit card payment, who’s to say you won’t have a late mortgage payment.
One late payment to a credit card or loan could make or break your approval. Even after you’ve been preapproved it’s important to stay on top of your payments. The lenders can pull out up until the house is closed on.
Tip: Write down your payment due dates in two different places to ensure that you remember. Create a reminder on your phone for a couple days before the payments are actually due.
- Understand the Market
When you apply to get pre-approved for a home loan, you have to specify which zip code you’re looking in and how much money you’d like to ask for. Do some market research in the desired area to make sure your request is reasonable. For example, if you’re looking in the 85251-zip code in Scottsdale, it’s probably unreasonable to ask for $150,000. The market in this area is hot right now, so your budget would need to be closer to a minimum of $300,000.
Contact a local real estate agent to make sure you understand the market you’re looking at. A good realtor should be able to tell you the best places to house hunt to get the most for your money. With these tips, you should be well on your way to purchasing a home in no time!