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Homeownership is a significant milestone that is achievable through a mortgage loan. However, most find applying for a loan complex, considering many factors, such as the lender’s criteria and economic factors.
In reality, getting your loan approved generally requires understanding key factors and taking essential steps to boost your financial profile. Continue reading as we discuss everything you need to learn, plus the best and proven practices for getting your loan approved.
What is a mortgage loan?
A mortgage loan allows you to borrow money to buy a property, particularly a residence. In exchange, you agree to settle the loan with interest over some time.
There are two types of Conventional Loans:
Fixed-Rate Mortgage – Interest rates are set in the loan term, making your monthly payments fixed.
Adjustable-rate mortgage: Interest rates may periodically change based on a particular index. Your monthly payments can start at a smaller rate but may increase over time.
Qualified individuals can also opt for Government-backed loans:
FHA loans – The Federal Housing Administration, or FHA, offers a low downpayment of as low as 3.5% of the property’s price. They may also accept less-than-ideal credit scores and relaxed requirements.
VA loans – The Veterans Benefits Administration provides low or no downpayment options and reasonable interest rates. VA loans are available for military personnel and qualified veterans.
USDA loans – The United States Department of Agriculture can offer 100% financing for the property and are made for rural property buyers.
How does it work?
Application and approval: A bank or credit union will assess your financial capacity to pay, including your income, debt if any, and credit score. Once approved, you will receive the loan.
Collateral: For security to the bank or credit union, the property you are buying serves as collateral for the mortgage loan. This means that if you are unable to pay for your financial obligation, the lender has the right to take the property.
Monthly payments: Each payment comprises the principal or the amount borrowed and interest or fee charged by the lender, and both are settled monthly.
Loan terms: Common terms or the length of time to repay the loan are usually 15 to 30 years.
How much can I borrow?
Lending companies and banks will provide you with an amount based on your income and debts. Remember that the more you earn and the less your debts are, the greater the amount you can borrow. Keep your monthly payment under 30% of what you earn. For example, a $5000 monthly income, after settling taxes and debts, has an ideal mortgage payment of less than $1500.
Tips to get your mortgage loan approved
After the highlights of a home loan, below are the best and proven ways to get approval:
1. Boost your credit score
While 620 is the minimum, an ideal credit score of 700 or higher is vital to getting favorable loan terms. To increase and have a consistent credit score:
- Pay your bills and other financial obligations on time.
- Settle your outstanding debts
- Maintain a low credit card balance
- Lessen new credit inquiries
- Monitor and dispute inaccurate information on your credit report.
2. Save up for a considerable downpayment
A considerable downpayment, or a deposit, is essential when applying for a mortgage. A sufficient deposit can help you secure lower interest rates and reduced monthly payments. However, lenders prefer deposits from your genuine savings—money that you have saved over time through regular savings like savings in a bank account or some investments.
3. Reduce your debts
Before applying for a mortgage, focus on reducing outstanding debts to improve your debt-to-income ratio (DTI). DTI is the percentage of your monthly income allotted for paying debts. Lenders consider your DTI to qualify for a loan. To improve it, pay your outstanding dues on credit cards and other loans. Improved DTI offers you a higher chance of getting approved and helps you manage your finances.
4. You must have a stable income
Lenders are keen on your source of income. If you have stable employment, no shorter than 6 months, or a business for more than 2 years, lenders will have the assurance of your ability to pay and may grant you the loan.
5. Choose a less expensive property
You can pick a property in a different part of the country where owning a home is less expensive. When your financial profile increases, sell your home and move to your dream neighborhood.
If you can’t move to other locations because of your job and other personal reasons, opt for a house with smaller square footage.
6. Complete the requirements
Tax returns, pay stubs, bank statements, and proof of assets are essential requirements you need to prepare in advance. Organizing them efficiently can make your loan process quicker.
7. Consider a reliable Co-signer.
If your income is low and you can’t qualify for a mortgage loan, consider getting a co-signer with an ideal income and credit history. However, ensure that your co-signer fully understands the risk involved, such as the settling your financial obligations if you fail to pay.
Summing it up
Follow our proven tips and secure your dream home as soon as possible!
Greater Alliance Federal Credit Union can professionally assist in securing your dream home. Compared to traditional banks, we have competitive mortgage rates to effectively help you save money over the life of your loan.
Our dedicated and experienced mortgage specialists provide personalized services and suitable solutions to ease the process. We also offer flexible terms to match your financial situation.
Whether you are a current customer or considering a switch in loan provider, we have refinancing options tailored based on your needs.
More importantly, we offer First Time Home Buyer Savings Program and HomeReady Program, designed to reduce the stress of buying your dream home.
Contact us today to learn more about our in-demand services. Our passionate member service team is ready to guide you in the exciting world of homeownership!
