About · Press · Contact · Write For Us · Top Personal Finance Blogs
Featured In:

6 Tips to Get Approved for a Home Mortgage Loan

By Valencia Higuera

mortgage loan approvedSome people don’t know the first thing about getting a mortgage loan. They hear reports of dropping interest rates and lower home prices and hastily decide to jump into home ownership. But the process of getting a home loan differs from getting a car loan or renting an apartment, and applicants who don’t recognize these key differences are often disappointed when a lender denies their mortgage loan application.

Educating yourself is key, and there are a number of ways to avoid this heartache and disappointment when applying for a mortgage loan.

Getting Your Mortgage Loan Approved

Buying a house is already stressful, and being ill-prepared heightens the anxiety. Why put yourself through this? Learn how to think like a lender and educate yourself on the best ways to get your mortgage loan approved:

1. Know Your Credit Score

It literally takes a few minutes to pull your credit report and order your credit score. But surprisingly, some future home buyers never review their scores and credit history before submitting a home loan application, assuming that their scores are high enough to qualify. And many never consider the possibility of identity theft. However, a low credit score and credit fraud can stop a mortgage application dead in its tracks.

Credit scores and credit activity have a major impact on mortgage approvals. According to the Home Loan Learning Center, a large percentage of lenders require a minimum credit score of 680 (620 for FHA mortgage loans) – and if your score falls below 680, lenders can deny your request for a conventional mortgage loan.

In addition to higher credit score requirements, several missed payments, frequent lateness, and other derogatory credit information can stop mortgage approvals. Pay your bills on time, lower your debts, and stay on top of your credit report. Cleaning up your credit history beforehand and fixing errors on your credit report are key to keeping up a good credit score.

2. Save Your Cash

Requirements for getting a mortgage loan often change, and if you are considering applying for a home loan in the near future, be ready to cough up the cash. Walking into a lender’s office with zero cash is a quick way to get your home loan application rejected. Mortgage lenders are cautious: Whereas they once approved zero-down mortgage loans, they now require a down payment.

Down payment minimums vary and depend on various factors, such as the type of loan and the lender. Each lender establishes its own criteria for down payments, but on average, you’ll need at least a 3.5% down payment. Aim for a higher down payment if you have the means. A 20% down payment not only knocks down your mortgage balance, it also alleviates private mortgage insurance or PMI. Lenders attach this extra insurance to properties without 20% equity, and paying PMI increases the monthly mortgage payment. Get rid of PMI payments and you can enjoy lower, more affordable mortgage payments.

However, down payments aren’t the only expense you must worry about. Getting a mortgage also involves closing costs, home inspections, home appraisals, title searches, credit report fees, application fees, and other expenses. Closing costs are roughly 3% to 5% of the mortgage balance – paid to your lender before you can seal the deal.

mortage

3. Stay at Your Job

I know someone who quit working seven days before she and her husband were to close on their mortgage loan. I have no idea why, and unfortunately, it didn’t turn out well for them. They weren’t able to close on their new home and they lost out on a great deal.

Sticking with your employer while going through the home buying process is crucial. Any changes to your employment or income status can stop or greatly delay the mortgage process.

Lenders approve your home loan based on the information provided in your application. Taking a lower-paying job or quitting your job to become self-employed throws a wrench in the plans, and lenders must reevaluate your finances to see if you still qualify for the loan.

4. Pay Down Debt and Avoid New Debt

You don’t need a zero balance on your credit cards to qualify for a mortgage loan. However, the less you owe your creditors, the better. Your debts determine if you can get a mortgage, as well as how much you can acquire from a lender. Lenders evaluate your debt-to-income ratio before approving the mortgage. If you have a high debt ratio because you’re carrying a lot of credit card debt , the lender can turn down your request or offer a lower mortgage. This is because your entire monthly debt payments — including the mortgage – shouldn’t exceed 36% of your gross monthly income. However, paying down your consumer debt before completing an application lowers your debt-to-income ratio and can help you acquire a better mortgage rate.

But even if you’re approved for a mortgage with consumer debt, it’s important to avoid new debt while going through the mortgage process. Lenders re-check your credit before closing, and if your credit report reveals additional or new debts, this can stop the mortgage closing.

As a rule, avoid any major purchases until after you’ve closed on the mortgage loan. This can include financing a new car, purchasing home appliances with your credit card, or cosigning someone’s loan.

sign mortgage loan

5. Get Pre-Approved for a Mortgage

Getting pre-approved for a mortgage loan before looking at houses is emotionally and financially responsible. On one hand, you know what you can spend before bidding on properties. And on the other hand, you avoid falling in love with a house that you can’t afford.

The pre-approval process is fairly simple: Contact a mortgage lender, submit your financial and personal information, and wait for a response. Pre-approvals include everything from how much you can afford, to the interest rate you’ll pay on the loan. The lender prints a pre-approval letter for your records, and funds are available as soon as a seller accepts your bid. Though it’s not always that simple, it can be.

6. Know What You Can Afford

I know from personal experience that lenders do pre-approve applicants for more than they can afford. After receiving a pre-approval letter from our lender, my husband and I wondered whether they had read the right tax returns. We appreciated the lender’s generosity, but ultimately decided on a home that fit comfortably within our budget.

Don’t let lenders dictate how much you should spend on a mortgage loan. Lenders determine pre-approval amounts based on your income and credit report, and they don’t factor in how much you spend on daycare, insurance, groceries, or fuel. Rather than purchase a more expensive house because the lender says you can, be smart and keep your housing expense within your means.

Final Word

If you don’t meet the qualifications for a mortgage loan, don’t get discouraged. Instead, let it be motivation to improve your credit and finances. Many people have risen above credit problems, bankruptcy, foreclosure, and repossession specifically in order to purchase their first house. Just be sure to implement a realistic plan and stick to it.

How long did it take you to realize your dream of home ownership? If you’re currently working toward this goal, what steps have you taken?

(photo credit: Shutterstock)

Valencia Higuera
Valencia Higuera is a personal finance junkie who enjoys reading articles on budgeting, saving money, and credit cards. She has written personal finance articles and blogs for several online publications. She holds a B.A in English from Old Dominion University and currently lives in Chesapeake, Virginia.

Related Articles

  • http://debtandburied.com/ Debt and Buried

    Not only is is tough to qualify if you’re left your job for a new one, it’s tough to qualify if you haven’t been at your job for two years. Given how many people have lost their job during the great recession, it’s amazing our housing crisis isn’t worse.

  • http://www.debt-tips.com/blog/ Kris @ Debt-Tips

    In addition to knowing your credit score you should also work on improving it. Both by making good financial choices, and by using credit repair. It’s not all that difficult, and there is nothing wrong with trying. You don’t need to do anything sneaky, and you can easily do it yourself. In the long run, if you save a percentage point or two on your mortgage it will be worth the effort.

  • http://barbarafriedbergpersonalfinance.com/ Barbara Friedberg

    I agree. In order to get an approval for your home loan, you need to have at least satisfactory credit rating and a job, of course. How can you convince the bank that you can pay your loan if you do not have a job and your credit score is ruined? I believe it will also look better if you have been in your job for a couple of years when you apply for a home loan.

  • MoneySmartGuides

    About five years ago your post would have simply consisted of: “have a pulse”. Boy have the times changed. All of these points are going to make it easier to get a mortgage, But with such tight lending policies, nothing is guaranteed.

  • http://www.ohiomortgagesolutions.com/ T.C. Strait

    Great article. Hit the nail on the head with all these points. It is amazing how far the pendulum has swung. 2003 you could get a mortgage as long as you could fog a mirror. Now even the squeaky clean borrowers are having to practically give up their first born. Will be forwarding this article out to my database. Thanks.

  • TheOneWithTheQuestion

    I want to take a home loan and I’m salaried. If after 2-3 months of loan sanction I quit my job and become self-employed, will there be any problem with bank regarding the loan, of course I will be able to pay the loan. I want to know if there will be any problem in such case.

  • http://freshstartsolutions.com.au/ Fresh Start Solutions

    Great tips here. Thanks for providing this great article!

  • Ashley Taylor

    Hello Everyone, I’m Ashley Taylor a resident/citizen of the United States of America.I am 52 years of age an entrepreneur/businesswoman. I once had difficulties in financing my project/business.If not for a good friend of mine who introduced me to Mr. Zack Arnold who is a money lender to get a loan worth $250,000 USD from his company. When i contacted them it took just 48 hours to get my loan approved and transfer to my account after meeting all their modalities a set forth in their loan agreement/terms and conditions. Even if you have bad credit they still offer there service to you. They also offer all kinds of loan such as Business loan,Home loan,Personal loan,Car loan,Loan for Business start up and Business Expansion.If you need an urgent financial assistance you can contact them today via this email ([email protected]) i don’t know how to thank them for what they have done for me but God will reward Mr Zack Arnold mightily.

    Thanks.

  • Mrs Mary Smith

    Hello Beloved People,

    I am Mrs. Mary Smith am writing this letter because am really grateful for what Mrs.Clara Morgan did for me and my family, when I thought there was no hope she came and make my family feel alive again by leading us loan of low interest rate of 3% I never thought that there are still genuine loan lenders in the Net but to my surprise i got my loan without wasting much time so if you are out there looking for a loan of any amount i would like you to email VIA ([email protected]) I wish you all success

    Regards
    Mrs Mary Smith

  • Angie Rees

    Nice post for those people trying to take loan for buying a new home. it’s very helpful for very one who have no own hose and have a dream for a home.

The content on MoneyCrashers.com is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor. References to products, offers, and rates from third party sites often change. While we do our best to keep these updated, numbers stated on this site may differ from actual numbers. We may have financial relationships with some of the companies mentioned on this website. Among other things, we may receive free products, services, and/or monetary compensation in exchange for featured placement of sponsored products or services. We strive to write accurate and genuine reviews and articles, and all views and opinions expressed are solely those of the authors.

Advertiser Disclosure: The credit card offers that appear on this site are from credit card companies from which MoneyCrashers.com receives compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, U.S. Bank, and Barclaycard, among others.