We all know how easy it is to get swept up in the excitement of buying a new home. Searching for a new home feels like an adventure, one that has a significant impact on your life.
However, before you can seal the deal on a new home, you have to apply for a home loan. Depending on your financial situation, this may be no big deal.
For many people, however, applying for a home loan is where things start to get jumbled up. Lenders take a lot into account when calculating what you’re approved for. In your head, you may be thinking you can get $500,000 no problem, while a lender may only offer you $350,000 or less.
Understanding how lenders find your loan value is crucial for getting into the home you want. Take a moment to look at these essential steps to take before going to see a lender.
Essential Steps Before Applying for a Home Loan
The following list is comprised of all the steps you need to take to maximize your approval on a home loan. As we suggested above, a lot of details go into the process of determining what lenders will offer you.
For example, you may very well be able to afford a million-dollar home, but if you’ve been lying on your taxes and only appear to be making $100,000 a year, you’re going to have problems.
However, assuming you’re not lying on your taxes, you’re not necessarily out of the woods yet. Check out the essential steps you should take before applying for a home loan!
1. Figure Out Your Own Needs
First, you need to figure out your housing needs.
How much house do you need? If you have a large or growing family, you’re going to want enough space for everyone to live comfortably. If it’s just you, you can probably keep costs down and buy a little more conservatively.
If you do have kids, what type of neighborhood do you want to be in? Nicer neighborhoods are typically more expensive to live in. Also, do you want to be close to schools, parks, etc.?
For you personally, how close do you want to be to work? Do you want to live in town or outside of it?
2. Know Your Credit Report
Next, you need to be fully aware of your credit report. Your credit score and the information pertaining to it will largely affect what you can be approved for while applying for a home loan.
Your credit report will tell you your credit score and give you all the details surrounding it. It will tell you what parts of your credit history are hurting you and what parts are helping you. There are several places online to get your free credit report.
We recommend starting there to get a good idea of where you stand.
3. Put a Pause on Spending
Next, if you’re considering applying for a home loan, you need to put a pause on all unnecessary spending. Lenders look at a major factor while considering your loan – consistency.
They want to see a solid pattern of income and expenses. If you’re thinking of getting a new car, taking out another credit card, or getting a personal loan, don’t!
Even if you’ve been pre-approved, making any significant financial moves can end up lowering the amount you’re approved for. Worse yet, you won’t know it until you go to put in an offer on a house. That’s a surprise you don’t want.
4. Start Paying Down Debt
Next, if you really want to dream big for your next house, you’re going to need a jumbo loan.
However, without having a solid debt to income ratio, a jumbo loan may be out of the question. Before applying for a home loan, take some time to pay down your debt. This will also improve your credit score.
Ultimately, lenders want to know you can pay them. If your credit report shows you’re barely scraping by each month, why would they approve you for a loan which requires you to pay thousands of dollars a month?
While we made the example of the jumbo loan, this applies to all loan sizes and types.
5. Don’t Make Any Big Changes
As well as not making any big financial moves, you also don’t want to make any big status changes.
For example, it would be a mistake to change jobs anywhere near applying for a home loan. As we stated earlier, lenders want to see consistency. If you get a new job, they’ll probably want to see at least six months of income from that job before they’ll grant you the loan.
Other things such as changes in marital status, alimony payments, and child support payments can have an effect as well.
6. Start Saving for a Down Payment
As much as you can, you need to start saving for a down payment.
The down payment required for a home is often based on the type of home loan you get and how expensive the home itself is. For example, an FHA loan may require as little as 3.5% down, whereas conventional wisdom suggests 20%.
In certain circumstances, such as with VA loans, you are even allowed to put zero money down.
7. Get Your Documents in Order
Next, when applying for a home loan, you need to make sure all of your documents are in order. You need to be prepared to avoid extra headaches and hassles.
Once again, lenders want to see consistency. You’ll need two months worth of bank statements and documented income. However, you’ll also need your tax documents from the last two years.
You will also need your driver’s license or other forms of identification and possibly, rental history.
Get a Free Quote
When applying for a home loan, make sure you shop around to get your best option. Additionally, keep in mind that different lenders will give you different amounts and interest rates.
However, if you’re interested in seeing what you can get pre-approved for, contact us for a free quote! We offer loans of all types and work with you to make sure you get what you deserve!