How to Qualify for a Home Loan
Loans can be a really tricky business, and banks seem to have these strange criteria for you to be able to get approved for a home loan. Today, we’ll talk about how to qualify for a home loan and I’ll reveal what goes on behind the curtains in banks.
Banks will make it look easy to get a loan, but in the end most of the time, you end up not qualified. What would it take really to be able to get a home loan?
It’s undeniably important to do some credit management. You need to know how to manage and build your credit over time if you’re using credit to qualify for real estate, a primary residence, or investment properties.
There are three different credit bureaus that would each give you a different credit score. And the banks will usually go off of the middle score. These three credit bureaus have a different way of coming up with your FICO score (credit score), but in general, they have a very similar algorithm.
Here are five simple tips on how to get a approved for a home loan in time, if not immediately:
Have at least three lines of credit.
Have a minimum of three credit lines. They’re called ‘trade lines’ in the industry. And a credit line would be like a credit card. Anything that uses and reports to the credit bureau. I use credit cards as an example because they’re the most popular.
To qualify for a home loan, banks will want to see usually a minimum of 2, sometimes 3 trade lines. They give importance to how long the credit card’s been open. This is so they can say that you know how to manage your credit. At least 12 months open and active is what you’re going for.
Don’t have too many credit lines.
Make sure it doesn’t look like you’re trying to get too many credit lines. Having too many credit lines give the impression that you actually NEED credit to live and survive. It makes you look desperate.
Be careful of credit inquiries.
Don’t apply for credit everywhere you go. You know those ‘10% savings at any retail stores if you apply for in-store credit card’ traps? Don’t fall for it! Don’t shop around too much. Don’t go to five different auto-loan places trying to qualify and get five different applications pulled on your credit. All these will ding your credit score even if just temporarily because of the inquiries.
Never go late on payments.
Never ever go late on any payments. Delinquency can stay on your credit for a long time. If you have some right now, don’t worry, they’ll fall off your credit within 1-3 years in the eyes of the banks at least. From here on however, make sure that do whatever it is you need to do to never be late on any of your credit reportings.
Use only 30% of your available credit.
Never use more than 30% of what’s available to you. If you have a $1,000 credit limit, then don’t go over $300. And if you do hit that $300 mark, make sure you pay it off immediately or at least over a couple of months. If you have your credit cards going up intentionally to that 30% mark and intentionally paying them off, you will actually build your credit.
What that tells the bank is that you can responsibly use your credit. That’s a HUGE part of qualifying for a mortgage – for them to see that you can handle small lines of credit.
When qualifying for a home loan, you need to be aware of three really important aspects:
Getting money and savings
While you’re on the preparation mode or getting ready to qualify, the banks are going to want to see that you can put that 3-5% down payment and that you also have at least 3-6 months of money in your bank. Let’s say you’re going FHA with a 3.5% down payment on a $200,000 house, you need to be able to show a $7,000 amount in your account.
And then for a 6-month mortgage payment, if the mortgage is $1,000, then the banks will want to see another $6,000 in your bank. This means you need to have at least $13,000 saved up for making this very important purchase.
The other thing that the banks are gonna be looking for is your job history. This is to confirm your stability; and by stability, it usually means having at least 2 years of job history in the SAME industry.
Did You Know?!
If you’re fresh out of college, say you graduated in Marketing and just got a job in Marketing with a starting salary of $40,000/year, because your job is on the same vein of what you graduated in, the banks will count your school as a 2-year work history.
Your debt to income ratio (DTI) determines how many ongoing, revolving debts you have each month that report on your credit compared to your income.
If you had an income of $4,000 a month, the typical bank will actually let you use 40% of that to go towards the mortgage. So $1,600/month will actually qualify you for a below the median house. The banks, although they all have a different rule for debt-income ratio management, will give you a little bit of a key indicator on how much you qualify for.
Here’s a bonus tip for you:
Find a home that can be a house. What do I mean by that? I mean buy something that will suit your family’s needs and help you sink your roots down, but get it at 15% discount at least! Why?
Because if you buy a house for $200,000 and it’s actually worth $250,00, then you’re automatically $50,000 richer at least ON PAPER! What does that mean down the road? It means that if you’ve gotten a bond, you can sell that house and you could take $40,000, and you can refinance that out later and put it towards an investment property.
One of my strongest pieces of advice FOR people is when it comes to buying your own primary residence, don’t just fall in love with something emotionally without making sure you also fall in love with the deal and the numbers. This is actually a great backdoor strategy to get into real estate investing!
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