Wouldn’t it be nice to shop for houses knowing that you can afford it? That’s how convenient it is for people who were already pre-approved for a home loan. But pre-approval is also as complex and as jarring as applying for a home loan when you already have a property in mind. With that pre-approved letter on hand, you don’t have to waste time looking at properties that are below or way above your budget.
But before you dive into the process of applying for a home loan, you should have five things first in your life: proof of income, assets, good credit, stable employment with something akin to a Lockheed Martin pension plan, and identification cards. You’ll be surprised to know that few people are actually qualified for a good interest rate. If you are in the midst of building your career and plan to buy a house soon, these are the five things you should prepare.
Proof of Income
Lenders will require that you produce the latest W-2 wage statements from your employer. This allows them to see how much you are earning every month. You’ll also need at least two of the most recent tax returns, as well as other proofs of income such as business sales, alimony, and bonuses. The lenders will depend on these documents to evaluate your ability to pay off the loan. They’ll compute your net income by deducting possible expenses and the mortgage payment. If they see that your income is enough to cover the repayments, then they’ll take that as a good sign.
The lenders would also want to know if you have assets you can use in case you cannot repay the loan based on your net income. These assets can come in the form of cash reserves and investments. You have to prove that you have the money for the down payment.
Many banks will require that you pay at least 20% of the total purchase price of the property. If you do not have money for the down payment, the lender will require a private mortgage insurance (PMI). While some financial institutions allow a low-down-payment scheme, this usually means a higher interest will be imposed on the outstanding balance of the loan.
They said that if you don’t use your credit card that much, there’s no way for credit agencies to grade your credit standing. That’s why it’s important for you to regularly make transactions using your credit card. But at the same time, pay off the balance of the credit when you can. To get approval for a conventional home loan, you must have a FICO score of at least 620.
Your credit score will be the basis of the interest rate of the loan. For example, those in the 620-639 range will get approved for a 4.656% interest rate while those in the 640-659 range will get a lower 4.1%. People with better credit scores such as 660-679 will only need to pay a 3.670% interest rate while those in the 680-699 range are often approved for 3.456%. Better yet, you should aim for the range of 700-759 and 760-850 because you can get approved for as low as 3.279% and 3.057%, respectively.
Probably one of the most important but overlooked aspect of home loan application is the stability of one’s employment. You need to prove that you are gainfully employed and that your employment status is permanent and stable. The lenders will not be happy seeing only your wage statements. They will call your employer to make sure that you are still with the company.
One of the things that they will look at is how long you have been with one company. Lenders typically want their borrowers to be with the same company for two years. The longer you are with the company, the more likely that they will approve your loan. Also, they prefer bigger and more stable companies than startups and small businesses.
The banks will want to see valid forms of identification from you. This includes driver’s licenses, passports, social security number and signature, and many other things. This information allows lenders to pull up your credit history. They can better assess your qualification for a loan once they are sure you are who you said you are. Additional paperwork will, of course, be asked as the lenders see fit. Always make sure you have copies of everything about your personal information and finances.
Don’t be afraid to try and get pre-approved for a loan. Even if you don’t plan of buying a home right now, it’s still nice to know that you can. If you get pre-approved, keep the letter with you and present that to a real estate broker once you’re ready to invest in a property.