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What to Consider When Applying for a Home Loan

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What to Consider Before Buying a HomeThe home buying process isn’t always easy, and without preparation, homebuyers can experience more difficulty than necessary. When you need a home loan, the hope is that your lender approves your loan application, but if you want the best possible outcome, it is equally important for you to both understand how certain factors can affect your ability to secure a home loan and what you can do to ensure your odds of approval are high.

If you are planning to purchase a home, here are a few things you should consider when applying for a home loan.

Your Credit Score

When it comes time to apply for a home loan, one of the many factors that will affect your eligibility is your credit score. It is likely that your mortgage lender will have a minimum credit score requirement, and if you don’t meet it, your loan application may be denied. It would be wise to review the minimum credit score requirement before you apply for a mortgage to ensure you have a good chance of getting approved.

If there is a lender that you prefer, but your credit score does not meet the credit score requirement, you can take the necessary steps to improve your score before you apply for a loan. Paying down a small debt, getting derogatory information removed from your report, or ensuring your bills are paid on time can all improve your credit score.

Down Payment

Homebuyers are often expected to put money down on their new home. This amount will vary, but people should keep in mind how their down payment can affect them. For example, how much you put down on your home will factor into the total cost of your home loan. The home may cost $200,000, but if you are putting down 10%, or $20,000, you won’t need to take out a loan for $200,000 to cover the total cost of the home.

Additionally, when you put down a larger down payment and decrease the amount of the home loan, a lender may be more open to approving your application and offering a lower interest rate, which will ultimately affect the total cost of the loan and your monthly payment amount.

Debt-to-income Ratio

In addition to reviewing your credit score, lenders will likely review your debt-to-income ratio. This number is important because it allows lenders to compare how much money you owe with how much money you make. You can calculate your debt-to-income ratio by dividing your total of their monthly bills by your total monthly income. For example, $2,000(monthly bills)/$3,500(monthly income)= 57%.

Type of Loan

Lenders offer different types of home loans, so you’ll want to determine what type of loan you will apply for when the time arrives. Depending on the lender, you may have access to loans designed for first-time homebuyers, veterans, and other buyers fitting of certain criteria. Along with these different types of loans may come different types of requirements, including the location of the home, credit score, and down payment amount.

With various types of loans existing, you can also speak to your mortgage lender to determine which is the best option for you.

Owning a home is a huge accomplishment. And as difficult as the home buying process may be for some, it doesn’t have to be. If you know where you stand, you may find fewer obstacles in your way and get approved for your dream home.

 

 

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What is a Mortgage Pre-approval & What Are the Benefits?

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When shopping for a mortgage, you need to have any and all information that will expedite the process. Knowing what limits you are working with can also help you during the negotiation process; this is where mortgage pre-approval comes in.

Mortgage pre-approval is a certified letter from a lender indicating how much you can borrow. It also states the different kinds of loans that you may be eligible for and the interest rates that you should expect. The letter is valid for around 60-90 days, after which you need another pre-approval assessment for your mortgage shopping.

Mortgage Pre-Approval

Requirements for a Mortgage Pre-approval

Being a financial assessment of your mortgage eligibility, the pre-approval process involves looking at the health of your credit. Among the requirements that lenders will ask for include;

  • Social Security Number
  • Permission to access your credit report
  • Recent pay stubs
  • W-2s
  • Federal Tax Returns
  • 2 months bank statements (all accounts types)

It’s important to note that a pre-approval letter is not a contractual agreement between you and the lender. It’s just an assessment and not a commitment to give you the loan.

Benefits of Mortgage Pre-approval

  1. Saves on time

Pre-approval provides you with an overview of the amount of loan that you qualify for. It also helps you to narrow down the types of mortgage programs that are available to you. This comes in handy in shortening the time that you may have spent on mortgage shopping.

Think of it this way; without a shopping list, you waste time by going up and down the aisles in a supermarket trying to locate what you might need. With a list at hand, you pick specific things, and in a short while, you are done. Pre-approval works in basically the same way; you spend time rate-shopping only on the specific loan(s) that you qualify for.

  1. Lenders take you seriously

Real estate is a very competitive industry. Lenders don’t want to waste time on people who are not serious about homeownership. It’s easy for them to dismiss your application if they are not confident in your commitment.

A pre-approval letter goes a long way in adding weight to your loan application. It shows that you a prospective client and that your offer demands serious consideration.

When a lender takes you seriously, your approval gets a boost. They will speed up the process since you have already demonstrated the ability and serious intent of purchase. Yours becomes a done deal and your application gets a head-start in closing. The appraisal can begin immediately which can lead to a shortened closing period; by a week or two.

  1. Gives you negotiation power

When a lender is negotiating with you, he will offer rates depending on the seriousness of your application. This means that he may offer somewhat prohibitive rates because he is banking on someone else who might also be lined up for the home. This is a genius business move on his side since it’s all about making the sale.

Pre-approval is a sure way to avoid this kind of frustration. The letter gives you an edge on the negotiating table. Your application will be carrying more merit and the lender will be more inclined to offer you cheaper rates. Pre-approval may also allow you to negotiate the rates to the lowest allowable for your loan amount and credit score.

  1. Knowledge of other costs

Apart from the principal amount and the interest that a mortgage will attract, there are other additional costs to contend with. Knowledge of these costs allows you to plan better and shop for a loan that you are able to sustain. Pre-approval allows you to have an idea of what these costs entail.

You will be provided with a list of additional costs that are to be expected. These include closing costs, homeowner’s association fees, taxes, and other government fees. This is important especially to those in the market for the first time. It will come in handy when you have to make a decision on a home that might require restorations or upgrades once bought.

The Take-Away

Getting pre-approved for a loan is an important step when shopping for a mortgage. It allows you to only concentrate on the property that you can afford. Lenders also get to take you seriously when you are bargaining on the rates. Your mortgage application also gets to be hastened since the pre-approval letter shows your income’s ability to pay off the loan.

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How Does Student Loan Debt Affect a Mortgage Approval

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Are looking forward to owning a house? You should know that mortgage companies comb through your credit history to evaluate how much of a risk you are. As such, if you have an outstanding loan, qualifying for a new loan facility can be tricky. So, exactly how does student loan debt affect a mortgage approval?

Basically, loan debts impact the two main factors that go into credit approval:

  • Debt-to-income Ratio (DTI)
  • Credit Score

How Student Loan Debt Affects Your Debt-to-income Ratio

Student Loan Debt Affects Mortgage ApprovalBefore your mortgage application can be approved, lenders check your financial records for your total debts against your income. This is what is known as the debt-to-income ratio. It factors your total monthly debt repayments and your pre income total.

Total debts include all income deductions that appear on your credit record. Such include child support, student loans, auto loans, personal loans, and credit card payments. It follows that the more indebted you are the higher your DTI will be and the riskier you are to lenders.

Suppose your monthly income is $3,000 and a recurring debt of $1,200 monthly. Your DTI is 40% ($1,200 divided by $3,000). Generally, lenders look for a DTI of between 36% and 43% or less. So, in this scenario, you will be in a prime position of getting approved.

However, if your student loan pushes your monthly debt to $1,500, your DTI rises to 50%  ($1,500 divided by $3,000), and getting a mortgage from a private institution becomes next to impossible. Your only reprieve is to try for a government-backed loan facility, such as FHA mortgages that accept up to a DTI of 50%.

Even then, you will be faced with stringent terms for the application to go through:

  • Large down payment
  • A large savings account or cash reserves
  • Extra income apart from the one used during loan application. This could be part-time payment or income from a seasonal contract.

How Student Loan Debt Affects Your Credit Score

If you are looking for a mortgage then you must have come across credit scores. These are 3-digit numbers that sum up your creditworthiness. One of the main credit scoring services, FICO, summarizes your financial risk on a range of 300 to 850 points.

Typically, lenders accept credit scores of 670 and above.

Below that score, you present too much a risk and creditors will be less likely to approve your mortgage application. Also, your credit score determines the rates that are available to you.

A score of 670 – 739 is good and will get you an ‘okay’ APR (annual percentage rate). Between 740 and 799, your score is indicative of ‘very good’ credit and gets you a mortgage at a much lower APR. However, for the best rates in the industry, you need a score of 800 and above which is considered ‘exceptional’.

So, how does your student loan debt figure into all this? The answer has to do with how credit scores are calculated. Your debt repayment history accounts for 35% of the score and lenders look for consistent on-time loan payments.

Further, 30% of your credit score factors into the total amount owed in all of your accounts. Seeing that a student loan debt represents credit that was utilized and never paid, means that your finances are overextended. As such, in the eyes of lenders, you are more likely to miss your mortgage payments, or worse still, default.

The Takeaway

Student loan debts present a challenge when shopping for a mortgage. For starters, you need to get on track with your payments so as to increase your credit scores. Also, consider getting a second job and keeping off new loans to reduce your DTI. Lastly, concentrate on growing your savings for when the time comes to put a down payment for your new home.

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Tips for Paying off Holiday Debt Before it Hurts Your Credit

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Now that the festive season is behind you, what remains with you are the beautiful memories and of course, the huge holiday debt that you accumulated.

As the new year kicks off, two factors can greatly impact your credit; how you pay (or not pay) your debt and how much of your available credit you are using. That said, late or missed payments on your credit cards can hurt your credit and so does using most of your available credit.

To help you stay on the right track, here are tips for paying off holiday debt before it hurts your credit.

1.  Cut Back on Your Expenses

One of the smartest moves in paying off debt is to avoid adding more debt. By slashing your expenses, you put your spending under control and reduce your reliance on credit. Also, you might free up some money which can go towards debt repayment.

Cutting back on expenses can take various forms depending on your spending habits. It may entail:

  • Creating a budget and sticking to it
  • Using cash instead of credit cards to pay for products or services
  • Cooking your own meals instead of eating out
  • Using public transport instead of driving
  • Re-evaluating and canceling subscriptions that you can do without
  • Decreasing your usage of utilities such as power and water
  • Shop around for better deals and lower prices on shopping

2.  Start Paying off Your Credit Card Debt

Your credit card debt is likely to hurt your credit more than any other debt. The reason being, credit cards not only carry high-interest rates but their utilization accounts for 30% of your FICO credit scores.

Credit utilization ratio (CUR) is the percentage of the credit that you are utilizing out of the total credit available.

For example, if the total available credit on all your credit cards is $8,000 and your available balance is $4,000, then your credit utilization ratio is 50% ($4,000/$8,000 X 100).

Higher credit utilization creates the impression of poor debt management. Prioritizing your credit card payments lowers your utilization rate, consequently improving your credit score and saving you money on interest payments.

Tip: Always aim to keep your CUR below 30%, and when looking to build credit, a ratio of 10% and below would be ideal.

3.  Take a Personal Loan

A personal loan is a loan that you take to use at your discretion and usually. It comes with a lower interest rate: While credit card rates can average at 14-15%, you can get a personal loan with interest as low as 6%.

You will, however, need a good credit score (690 and above) and stable income to negotiate a good deal. That said, lower scores will attract more interest but you can still land better rates than with credit cards.

As such, if diligently, such as offsetting your credit card debt, you can use the loan to save your credit in the long run. Also, personal loan lenders are increasing by the day, opening more avenues to shop around.

4.  Get a Balance Transfer Card

If you are faced with several credit cards with high interest, a balance transfer card can help you save on interest and pay your debt faster.

Typically, a balance transfer credit card charges zero or low interest for a promotional period of 12-18 months. This gives you an opportunity to pay off only the principal of your debt or if any interest, at a lower rate.

On the other hand, this type of credit card may also temporarily hurt your credit in two ways:

  • Moving your credit to the new card may increase your credit utilization ratio
  • Opening a new credit card account may result in a hard inquiry which may bring your score a few points lower
  • A new account will affect the average length of your credit history

Nevertheless, the effects of the above factors on your credit are less severe compared to the effects of not eliminating your credit card debt in the long run.

Better yet, you can still do a balance transfer without hurting your credit using the tips below:

  • Ensure that you can clear the debt without fail and within the promotional period
  • Make sure that the balance you transfer does not max out your transfer card or cause a higher credit utilization ratio
  • Avoid adding more debt to both the original card and the balance transfer card until you have cleared your debt
  • Inquire if there is a balance transfer fee and assess its financial impact beforehand

The Bottom Line

It is possible to repay your holiday debt before it hurts your credit. This, however, calls for drastic measures such as change of spending habits, consistency, discipline, and sacrifice. While at it, you might want to start saving up for the next holiday to avoid finding yourself in the same situation come next year.

For further financial advice, credit repair, and consultation, contact Credit Absolute.

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