Have you ever wondered how to apply for a home loan? I’ll not only show you how to apply successfully, but I’ll also show you why your home loans have been getting rejected.
So you’ve tried to obtain a home loan unsuccessfully! It is not easy, is it? And what’s even more frustrating is when you do apply and then get declined, the bank doesn’t even bother contacting you to tell you why they rejected your loan application.
You could have a good income, great credit, and still not be able to qualify for a home loan. Why? It all has to do with your debt-to-income ratio.
Travis Hornsby, the founder of Student Loan Planner, said the first thing banks look at when considering your application is a borrower’s debt-to-income ratio or DTI.
This is the amount of money you currently spend on debts (rent, credit cards, car loans) versus how much income you make.
When this ratio is too high — say 40 percent or higher, it can be a red flag that you’re not financially stable enough to support more debt in the form of a mortgage payment.
The best way to increase your chances of getting approved for a mortgage is to bring your DTI down.
“It allows you to qualify for more dollars,” he said.
“A person that has a DTI of 50 percent can only qualify for $50,000 in funds; whereas if their debt was 15 percent lower they could qualify for $75,000.”
Most loan applications get rejected by banks, as most banks have very strict policies regarding your eligibility for a loan.
Other Reasons Why Your Home Loan Might Get Rejected
Let me show you some other reasons why you may be rejected:
A lot of people have been rejected because they don’t have the required documents or they are not eligible for their desired loan.
You need to make sure that you provide all the documents required. It’s better to apply when you have almost all the documents ready than to be refused in the middle of the process because you don’t have those documents.
You should also make sure that you do not lie on your application form.
Lying never works in your favor, whether it’s on an application form, during an interview, or even if you’re asked about your financial status later on when you want to borrow money from another bank.
Related: Different Types of Mortgage Loans
Bad credit score
The way banks assess creditworthiness is different from lender to lender, but there are two aspects that will affect your eligibility for a loan – poor payment history and high debt burden.
Let’s look at poor payment history first. Banks will take into account how many times you missed payments in the past and how long ago those were.
They will also look at whether any late payments were due to genuine reasons.
You don’t have enough savings
Banks want to see that you have enough money for a down payment, closing costs, and an emergency fund, so if you don’t have much in your savings account, you might be denied.
The down payment is typically 20 percent of the home price, but it can be as high as 25 percent.
If you’ve been unemployed for a while or your income fluctuates, the bank may require a larger down payment to protect itself against fluctuations in housing prices.
You’re new to the area
If you’re just moving to the area, it will take some time before banks know who you are.
This can cause problems if you want to buy a home right away because banks don’t know what type of person they’re dealing with yet — are you someone who will pay off your mortgage over time or walk away from it?
To work around this problem, ask people from your community who they use for home loans and try to do business with them.
If you want to purchase or refinance a home, knowing how to apply for a home loan is the first big step.
This article explains how to apply for a home loan in full.
From determining what type of loan you need to submit the final paperwork, we’ll cover the entire home buying process.
What Type of Home Loan do You Need?
When you are looking for a new home, there are many things to consider.
Is the neighborhood safe?
Are the schools and infrastructure up to date?
What about the cost of living?
And, of course, there’s that most important question – how much can I afford?
This is where a mortgage comes into play. Mortgages are not one size fits all. There are many different loan types and even more options within each type.
It’s important to understand what type of loan will best fit your needs and your financial situation.
The first thing you need to do is decide whether you want a variable/adjustable-rate mortgage or a fixed rate option.
These loans have an interest rate that stays the same throughout the life of your loan. You don’t have to worry about interest rates rising because your payments will stay the same.
The downside is that if rates drop lower than your fixed-rate mortgage, you cannot take advantage of it.
Variable Rate Mortgages
With these loans, your interest rate can fluctuate with market conditions. Typically adjusted monthly and annually, as interest rates rise, so does your mortgage payment.
While this may seem like a disadvantage, it actually can work to your advantage over time because if interest rates go down instead, your payment will decrease!
So even though this type of mortgage gives you more flexibility in the short run, in the long run, you are protected from unpredictable increases in interest rates.
What You’ll Need to Apply for a Home Loan
The first step in the home loan process is knowing what you need to qualify for a mortgage. Some loans will require more paperwork than others, but here is a rundown of the documents that most home loans require:
- Driver’s License, Social Security Card, and Birth Certificate.
- Pay stubs and a W-2 form from your employer(s) in the past two years.
- Copies of your last two federal income tax returns that show all salary and any other income (self-employed people must include profit/loss statements and balance sheets).
- A copy of your divorce decree or other documentation showing how alimony and child support are paid. If you have a prenuptial agreement or postnup, make sure it is brought to closing.
- A letter from your bank verifying that you have a positive balance in savings, checking, and/or money market accounts.
- A letter or certificate from your pension plan provider. This must be provided by the institution that actually manages the plan, not just by your employer who sponsors the plan.
- A copy of your most recent statement from any investments (mutual funds, stocks, bonds, etc.) These should be paper certificates, not just electronic records.
- Down payment: Most lenders like to see at least 20 percent of the purchase price in cash. But there are programs that allow buyers with a lower budget to finance 100 percent of the purchase price. Some homebuyers use “gift funds” from friends or family members to make up their down payments, but they still have to qualify for the mortgage debt that exceeds the value of their home.
How to Apply for a Home Loan
Getting a home loan can be tough, especially for first-time homebuyers. Getting a home loan is a long process that involves numerous documentation and forms.
The application process can be complicated and time-consuming, but it doesn’t have to be.
We’re here to help you get through the entire process with ease and confidence.
Gather your paperwork and information
The first step to getting a home loan is to gather all of your personal information. This includes things like your Social Security number, driver’s license number and any past addresses you’ve lived at, as well as income and employment history.
If you are currently employed, make sure you have a copy of your most recent pay stub.
Make a list of all the loans you currently have
Now that you have all of your information together, make a list of any loans you currently have open so that if the lender asks, you can give them the details on each one.
This includes auto loans, personal loans, car leases or contracts, and other types of revolving credit accounts.
Also, include any mortgages that are currently open so that the lender can see where your mortgage payment history stands before offering to take over this existing loan or allow you to apply for a new home loan.
Check your credit score
After gathering all of this information, it is also important to check your credit score with one of the many online credit checking services available.
This is important because it will determine whether or not you are approved for a mortgage and what interest rate you will pay.
You can get a copy of your credit report from one or all three of the major credit bureaus: Experian, Equifax, or TransUnion.
It is important that you check them all because mistakes can be made.
If there is an error on one report, it could affect your score at all three.
Your credit score must be at least 680, though you can get approved with a score as low as 500 sometimes.
Decide which type of loan works best for you: Conventional, FHA, or VA
Home loans come in three basic types: conventional, FHA, and VA.
A conventional loan is issued by a bank, credit union, or mortgage company. To qualify for a conventional loan, you must have good credit and enough income and assets to make the payments on time.
Conventional loans are not insured or guaranteed by the government. Conventional loans are the most popular type of home loan.
Conventional loans usually require a down payment of at least 20 percent of the home’s purchase price. However, some conventional loans may allow you to put down as little as 3 percent.
FHA loans are insured by the Federal Housing Administration (FHA), which means that if you default on your loan, the federal government will pay the lender in full for all losses up to certain limits.
FHA-insured mortgages come in two types – a mortgage with a fixed interest rate that is renegotiated every year; and an adjustable-rate mortgage (ARM), which has an interest rate that is adjusted periodically – usually every 6 months or 1 year – based on changes in an index such as the U.S. prime rate.
FHA loans require a down payment of at least 3.5 percent of the home’s purchase price but can be as much as 10 percent.
Related: How to Get a Second Mortgage
VA loans are a special type of home loan.
VA stands for the U.S. Department of Veterans Affairs, which guarantees that eligible service members will receive a mortgage loan with no down payment and no private mortgage insurance.
Being a veteran is one of the best ways to get a mortgage loan.
The VA loan program offers many benefits, including no down payment and no private mortgage insurance (PMI).
It’s also quite easy to apply for a VA loan.
A VA loan is a mortgage loan available to qualified U.S. military veterans, active-duty service members, and certain qualifying surviving spouses.
If you are a veteran or on active duty, you may be eligible for a VA home loan.
Find a lender
There are literally thousands of lenders to choose from, but you want one that fits your needs.
The type of loan you are eligible for will depend on your income, debt, and other factors.
The best place to start your search is online. There are many websites where you can compare rates and terms from hundreds of lenders at one time.
You don’t have to apply with the first company you come across and can compare different companies without contacting them.
Get approved for your loan
If you’re planning on purchasing a home in the near future, then getting approved for a loan is one of the most important steps you can take.
Getting approved for a loan doesn’t necessarily mean that you’ll get the home of your dreams, but it does mean that you’re on your way to making your dream a reality.
Getting approved for a home loan isn’t easy, but it’s not impossible, either. To get started, make sure you’re prepared financially. Then take these steps:
- Get your credit in order. To qualify for most mortgages, you must have a good credit rating and history. Check your credit scores and report before you apply for a home loan. If there are any errors on your report that could be damaging to your application, get them corrected as soon as possible.
- Save up for a down payment. Most lenders require that you make at least 10 percent of the purchase price of the home upfront. The more money you can bring to closing, the better your chances are of getting approved.
- Calculate how much of a loan you can afford. Most lenders will use one of two methods to determine how much they’re willing to lend you — the front-end ratio or the back-end ratio method. The front-end ratio is calculated by dividing your monthly housing expenses by your gross monthly income. For example, if your monthly housing expense is $2,000 and your gross monthly income is $5,000, this would equal 0.4 on the front-end ratio scale (0.2 equals 30 percent).
- Then apply for a loan and secure it in 30 days.
Find your perfect house!
Start by considering your housing needs.
Do you want to live near your current job?
Or are you willing to move to another neighborhood, city, or even state, depending on the price tag of your new home?
Do you have enough for your down payment?
If not, will you be able to get a loan from your parents or other family members?
Next, start thinking about what kind of house you want – a condo, townhouse, or single-family home.
Condos and townhouses may be more affordable than single-family homes. This can be especially true for young families who don’t have the income or savings for a large down payment.
On the other hand, condos and townhouses are typically smaller than single-family homes – and often come with monthly maintenance fees and property taxes.
Homes in the most popular neighborhoods can get expensive fast. They’re also often out of reach for buyers without strong credit scores and high incomes.
That’s why it pays to do plenty of research before making an offer on that dream house.
Choose an inspector to give your home the once-over
When you purchase a home, there are many decisions to make. One of the most important ones is choosing whom you will have to inspect your new home before the purchase is finalized.
You will want an inspection that can give you a good idea about the overall condition of the home and a report on any problems or deficiencies.
The best place to find a good inspector is from your real estate agent. He or she should be able to recommend inspectors in your area who’ve done work for other people in your neighborhood.
Be sure to get recommendations from several people before you make your final choice.
The inspector should be able to give you references of clients that he’s worked with in the past and tell you about his fees and services.
There are several types of inspections: electrical, plumbing, septic, termite, and so on.
The size of your house and the type of loan you’re taking out will determine which ones you should get.
In addition to inspecting the physical structure of the home, another important part of the home inspection process is meeting with the inspector to review any major issues or concerns that he or she may have with the property.
It is important that you understand any potential risks associated with purchasing this particular house as well as whether there are any specific defects or problems that could affect your stay there.
Sign on the dotted line
Before you sign on the dotted line, consider carefully whether or not this is really what you want.
A home loan is not just a single transaction; it’s an ongoing relationship with a lender.
On top of that, if something goes wrong, it can affect your credit rating and even make it difficult to rent an apartment the next time you move.
When you borrow money for a mortgage, make sure you understand all of the aspects of the deal and ask questions if anything is unclear. It’s your money, so don’t feel silly about asking for details.
We hope this guide helped you learn how to apply for a home loan.
In sum, applying for a home loan is a relatively straightforward process, but that doesn’t mean you shouldn’t do your research ahead of time.
The more prepared you are, the smoother the process will be—and that makes it much easier to find your dream home.
Also Read: How Long Does a Mortgage Preapproval Last?