Real Estate Guide: How to Qualify for a Home
Posted by Bill True on
How to Qualify for a Home Loan
Long before you start browsing properties for sale, you will want to put your finances in order. The better prepared you are, the easier it will be to qualify for the home loan you need. Here are 6 home loan tips to help prepare you for what's to come.
1. Establish your budget.
Make sure you hold onto your receipts and use them to create a budget for what you've actually spent over the last few months. The advantage of using your receipts is that it includes unexpected expenditures (such as illnesses and auto repairs) as well as regular costs such as rent and utilities.
2. Control your impulse purchases.
You know what your rent and utilities cost each month, but small, impulsive purchases can pile up. Before you buy, consider, "Is this worth breaking my budget for?" Keep the image of your future home in mind as you save instead of buy.
3. Reduce your debt.
Most lenders are looking for a total debt load not exceeding 36% of your total income. Because this figure includes your mortgage (typically 25 to 28% of your total income), you'll need to get the remainder of your installment debt (car loans, student loans, credit cards) down to under 10% of your income.
4. Save for your down payment.
While it’s sometimes possible to get a mortgage with only 5% down, and even less in some cases, you'll get a better rate and a lower overall cost if you put down more. Make it your goal to save for a 20% down payment. Create a fund (or even a savings account) specifically for a down payment, and don’t merely save what’s left at the end of the month. Instead, decide on a specific amount to save each month, then put it away when you pay the monthly bills.
5. Stay with a job.
Aim to stay at your current job for 2 years or more before applying for a home loan. If you've been in your current job less than 24 months, you may have to pay a somewhat higher interest rate.
6. Establish a good credit history.
Get a credit card and make every payment on time. Do the same for all your bills. Late payments (or even worse, defaults) can severely impair your ability to qualify for a home loan.