6 Tips to Get Approved for a Home Mortgage Loan

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.


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?

  • 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!

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  • 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.

  • brian

    it is pathetic you can be turned down for a loan that is less payment than rent that goes up every year

    • FW

      Rent in not a 15 or 30 year commitment and if you don’t pay the rent you are out the door and another renter in quickly. If you dont make the mort payment the bank has to sell your house, possibly at a loss, which is a much harder, costly, process then eviction. Do a whole lot more research before you get any type of loan my man.

      • brian

        you should be killed for such a lie

  • Jamie Jacobs

    What’s the minimum score you need to get approved for a home loan? I have a 600 score and can’t find anyone who can help me without having a 640 score.

    • Jenna

      It’s 580 I believe, I was approved with a 590 score a week ago. Check out The Lenders Network, they have lenders that work with low credit scores.

      • Jamie Jacobs

        They got me a lender to approve us!! Thanks so much for the info Jenna!!!

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    My son is in the process of trying to finance a modular home on the property that he owns. He doesn’t have a high credit score because he doesn’t have anything on credit. He also was unemployed for the last several years and now has a job (5months) that is 1099d. He owns the property that the home will be put on. What options does he have when it comes to financing?

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