How to Get Approved for a Home Loan
This is a great time to buy a home! Prices are low and inventory is high in most areas of the United States. Before you launch your search for the perfect property, learn how to get pre approved for a home loan.
It is important to note the difference between getting pre approved and pre qualified. In order to get pre qualified for a loan, you can provide information to a lender about your income and liabilities. This is an informal process and does not require any documentation from you. Based on your word, a lender will tell you about how much you should be able to pay for housing (including taxes and insurance). Getting pre approved for a loan is a more formal process and will require some work on your part to document your income and your debts. You may be required to pay a loan application fee and the cost of a credit report.
Learn how to get pre approved with these simple steps:
- 1. Evaluate your situation. Make a list of all steady sources of income available to you. Make another list of debts and monthly expenses. Don’t cheat. Include debts even if they are not likely to show up on your credit report. This process will help you take an honest look at your current financial situation. In general, mortgage lenders look for a maximum total debt-to-income ratio of 41 to 45 percent including housing expenses.
- 2. Determine how much you can afford to pay for a down payment. Conventional loans usually require a minimum of 20 percent of the total price of the home. There will be other closing costs due when you finalize the loan. Be sure to factor in amortized property taxes due at closing, homeowner insurance, bank fees, etc. The higher your down payment, the more favorable your loan conditions will be.
- 3. Obtain a free copy of your credit report. The lender to which you apply will order a copy of your credit report (one you will probably have to pay for). Before you apply for a pre approval, know what is listed on your report. By federal law, you are entitled to one free credit report in a 12-month period from each major credit reporting agency. You can easily obtain your free report at www.annualcreditreport.com. You can also call the three major nationwide consumer credit reporting agencies:
- Equifax: 1-877-576-5734; www.equifax.com
- Experian: 1-888-397-3742; www.experian.com/fraud
- TransUnion: 1-800-680-7289; www.transunion.com
