Buying a home is an important life decision, and part of the American dream. But, for many, the thought of getting approved seems like a pipe dream. All the red tape and confusing real estate jargon can make some feel intimidated. So, let’s pull back the curtain, break down, and demystify the process of getting approved for a home loan. Together, we’ll also explore some money-saving strategies that will help you unlock the door to your dream home.
Are you ready to hear the words: “You’re approved?”
Then, read on!
Make a Plan Based on Your Goals for the Future
Planning to purchase a home requires a mix of thoughtful introspection and detailed logistical planning. Take a look at the life goals that are most important to you and what kind of property aligns best with those goals.
Where do you see yourself living in the coming years? What type of lifestyle aligns with your personality and budget constraints? Knowing the answers to these questions is the first step towards defining your goals and making a plan that aligns with your deepest desires, and your budget.
Define a Monthly Budget and Automate your Savings
The key to saving is to make it easy and automatic. First, calculate your expected monthly expenses, including food, rent, living expenses, car payments or maintenance, debt payments, recreation, travel, and shopping. If you don’t know where to begin, looking back at your previous spending habits can be helpful to establish a baseline of monthly expenses.
Next, prepare a simple balance sheet that compares your monthly income and expenses, and calculate how much you can reasonably save each month. Finally, work with your bank to automatically transfer this amount to a savings account. Most banks have the option to set up low balance alerts for a checking account, which is a good idea if you’re worried about accidentally overdrafting.
Your goal should be to reduce the time and cognitive load needed to save a substantial portion of your income each month.
Form a Strategy to Build Credit
Improving your credit score will increase your chances of being approved for a home loan with lower interest rates. Building credit takes time, but if you’re organized enough to systematize and automate the process, it isn’t particularly difficult.
First, conduct an analysis of all of your current outstanding debts and credit card balances. Set up monthly autopay to make sure you don’t miss credit or loan payments. In the case of credit cards, it often makes most sense to automate the payment of your statement balance each month to avoid paying the high interest rates that most credit cards charge. If this isn’t possible, consider taking out a personal loan from a bank to pay off your credit card balance, and then setting up automatic payments to your bank loan. This will allow you to pay off your debt with a lower interest rate and build credit in the process.
Evaluate your current yearly income and credit score to find a credit card for which you have very favorable approval odds. It’s important to apply to a credit card you’re confident you’ll get approved for because each application will cause a soft pull on your credit report. Don’t apply to too many credit cards at one time, since that could also hamper your chances of getting approved.
Make a Budget that Includes Closing Fees, Insurance Payments, Maintenance Costs and Tax
Before applying for a home loan, it’s important to define the budget that you have to allocate towards your new home, and to factor in your projected costs, including fees outside of your monthly mortgage payment. Too many homeowners neglect to include closing costs, insurance payments, property tax, and maintenance when budgeting for their future home.
To this end, it can be helpful to speak to a real estate professional to create estimates of these additional costs, and figure out what sort of property and location suits your budget.
Understand the Difference Between Getting Prequalified, Pre-Approved, and Approved for a Home Loan
Many prospective homeowners are unclear about the difference between getting prequalified, pre-approved, and approved for a home loan. Each of these terms have their own distinct definitions, and it’s crucial for you to understand them.
Getting prequalified for a home loan simply means that you’ve provided the bank or lender your personal financial information including your savings, income, assets, and debts. Based on this information, the mortgage lender gives you an estimate of the loan amount they might approve. Importantly, this information is never verified by the lender, and the approximate loan amount is subject to change. However, prequalification can be useful in determining the approximate loan amount you can expect from a lender so that you can better shop for a home without the lender pulling your credit report.
Pre-approval, on the other hand, refers to the process of filling out a mortgage application and providing your social security number with the lender so that they can pull your credit report to check your credit score, and verify the financial information you’ve provided. It’s important to note that in the pre-approval process, a lender will typically perform a hard pull on your credit report which, unlike a soft pull, can impact your credit.
Lenders will ask for several documents as part of the pre-approval or mortgage application process. These often include the terms of the specific loan you’re applying for, the property information and purpose of the loan, your employment information, your monthly income and combined housing expense, your assets, your liabilities, and your financial declarations, including past bankruptcies you’ve filed. The lender assesses this information and considers your debt-to-income ratio and your loan-to-value ratio when deciding whether to grant you pre-approval for a loan.
Final approval for a home loan occurs after you’ve identified which property you will be buying and submitted all relevant documentation and information to the lender. Many prospective homeowners seek pre-approval because it allows them to shop for a home with confidence, and earn the trust of potential home sellers by knowing that the financing for the purchase is secured.
Following the tips above will guide you through the process for saving for a home and getting approved for a loan. If you continue to have difficulty getting approved for a home loan, you can always consider partnering up with a co-borrower who has a good employment history, income, and credit history.
Interested in securing a loan quickly and easily?Reach out to an Astar loan officer to discuss your mortgage loan options today! Email firstname.lastname@example.org or call 888-ASTAR-11 (888-278-2711)