Summer is in full swing and marks the beginning of the home buying season. Historically low mortgage rates and falling home prices are prompting many consumers to start shopping for homes. While market rates may be in a buyer’s favor, lending criteria remains strict and there are several actions individuals should take prior to submitting a home loan application to improve their chances of getting approved.
First, it’s crucial that applicants check their credit report and score. A consumer’s creditworthiness will play a central role in whether they are approved for a loan. Following the recession, lenders have increased their credit score requirements in an effort to avoid taking on risky borrowers. Most industry professionals encourage borrowers to check their file roughly six months in advance to submitting their application because it will give them time to correct mistakes and change behaviors that may be hurting their score.
Second, consumers should determine how much they can feasibly afford to spend on a home. Housing costs typically represent the largest monthly expenditure consumers are responsible for, and choosing a property that does not eat into too much of their take-home pay can help borrowers avoid debt and financial strain. Most experts discourage owners from taking on a loan for which payments exceed 28 percent of their monthly pay. Consumers can benefit from enrolling in housing counseling sessions, which can help them seek out affordable mortgages. These services can assist buyers in mapping out a money management plan that allows them to manage mortgage payments, while still having enough income to contribute to retirement, savings and other financial goals.
Lastly, borrowers should begin saving for a down payment and closing costs. Down payments may range from 3.5 percent for loans backed by the Federal Housing Administration to 20 percent for traditional lenders. Those who qualify for Veterans Affairs loans are not required to make a down payment. A large down payment can not only help buyers qualify for a mortgage, but also reduce their monthly payments and exempt them from being required to purchase private mortgage insurance, or PMI. Consumers who make a 20 percent down payment do not have to pay PMI, which is a policy paid to the lender that protects that bank in the event that borrowers default on their loan.