5 ways to improve your chance of getting a home loan
The first step to buying a home is applying for a mortgage loan. There are many factors that go into deciding whether you can get approved for one, including your credit score, credit history, and household income. Here are five ways to improve your chances of getting approved.
The importance of home loans
When you are looking to buy a home, few people can afford the total cost of the home right out of their pocket. Most people have to take out a mortgage loan, which is when a lender gives them a set amount of money with which to purchase a home. The homebuyer and the lender make an agreement that the loan will be paid back-with interest-over a certain number of years. During the course of the loan, the bank owns the rights to the home, and if the loan is ever defaulted on the bank will own the house.
Whether you are already a homeowner or are thinking about buying a home, it’s important to understand home loans so you can make good financial decisions for you and your family. Taking out a mortgage you can’t afford or don’t understand is dangerous and could even be devastating. The good news is, you can educate yourself and empower yourself to make good decisions by doing your research on what kind of mortgage loan you need, how much house you can afford, and how to increase your chances of getting approved.
Make responsible payment decisions
The most important thing you can do to boost your credit score and improve your credit score is consistently making payments on-time. A good payment history shows the lender that you are responsible with your money and with your past lines of credit. If you can make more than the minimum payment, that will help reduce the total amount of credit you have on your credit history. By keeping up with your payments and the total amount of credit that you have, you can keep your debt from getting out of control. Here are 4 ways to stay up-to-date with your payments:
- Pay your bills on time.
- Pay more than the minimum payment if possible.
- If at all possible, don't pay your bills late.
- Avoid letting your debt get out of control.
Pay down credit card debt
Paying down credit card debt is a great way to improve your chances of getting a home loan. The less money you owe on other loans and lines of credit, the better. If you have any leftover debt from other accounts--especially large amounts of credit card debt--it's important that you pay those off before applying for a new mortgage.
If possible, try not to close an existing account without first paying off its balance completely; this will help boost your overall score and make lenders more likely to approve your application. When closing an account, be sure that all outstanding balances are paid off in full before doing so, otherwise, the lender might consider it "delinquent" and report it as negative information on future reports (which could hurt scores).
Eliminate open collections
Collections are delinquent debts on your credit report that have been sent to collection agencies after multiple attempts have been made to settle the debt. If these items remain on your report for too long, they can become part of your overall debt-to-income ratio and make lenders hesitant about giving you money in the form of a home loan.
If you have collections, it's important to understand how much they affect your chances at getting a loan.
However, there are ways to deal with your collections:
- Pay them off or settle with the collection agency as soon as possible so they don't show up on future reports.
- Negotiate with the collections agencies on the amount owed. Sometimes, they will reduce the total amount to a third of what was originally owed to help you settle the debt more promptly.
- Work with the collections agency to set up a payment plan for larger debts.
Work with a credit repair company
Credit repair companies can help you improve your credit score by eliminating negative items on your credit report, disputing inaccurate information, and understanding how the scores are calculated.
Negative items on a person's report include late payments, collections accounts, and bankruptcies. These will lower their score drastically and make it harder to get approved for home loans or even apartments in some cases. A reputable company will work with creditors and collection agencies to remove these negative marks from your report so they no longer affect it as much--or at all!
Sometimes, your credit history can have incorrect information due to identity theft or issues with payment or insurance. Credit repair companies often specialize in helping people whose identities have been compromised. They know exactly what needs done when dealing with lenders who may refuse due diligence requests from "unknown" individuals looking into their files before granting access.
A good credit score can help you close a deal on time and get a better interest rate
A good credit score can help you close a deal on time and get a better interest rate. A credit score is a number that represents your credit worthiness. It's important to understand how lenders use them to determine whether or not you can qualify for a loan.
Your lender will check your credit report before deciding whether or not they want to give you financing. Most lenders use FICO scores as part of their underwriting process, but there are other scoring models as well (e.g., VantageScore). The higher the number, the better--and most lenders will expect an applicant's score to be at least above 620-640 before approving an application for financing.
Improve your chances of getting approved for a loan
To improve your chances for a home-loan approval, make sure you have good credit. A good credit report is considered having a score above 650 and no delinquencies or collections on your report.
If you have bad debt (such as unpaid medical bills), try to pay it off before applying for the loan. If this isn't possible, ask the lender if they'll accept partial payment from another source before closing on the house--and keep in mind that lenders may charge higher interest rates for borrowers who don't repay their debts in full at closing time.
The key to getting a home loan is to make sure your credit is in good shape before applying. If you're looking for help with improving your credit score or repairing collections on it, contact a credit repair company today. Prepare yourself for the home loan application process with homebuyer education courses today.
Making these changes before applying will help improve your chances of getting approved for a loan without having to put extra money down.
To learn more about how your finances and credit score affect your chances of getting a mortgage loan, register for one of our homebuyer courses today