There are a lot of potential first-time home buyers and millennial’s that delay getting a mortgage because it seems like a long and daunting process. But, qualifying for a home loan doesn’t have to be intimidating. There are new mortgage options available in 2018 that make it easier to qualify for a loan – and we will show you show you everything you need to know to qualify as a first-time home buyer.
Copy of Your Credit Reports
The first thing you need to do is get a copy of your credit report from all three credit bureaus. Grab a free copy of your report at annualcreditreport.com. This is a Government run site that allows consumers to get a free copy of their credit reports once per year. You will also need to know what your credit scores are – Credit Karma, Credit Sesame and Wallet Hub can help you spot errors.
Once you have pulled all three reports you need to go through each report to verify there are no errors. If you find any you should contact the credit bureau immediately to file a dispute. Errors to Look For include Incorrect employers, Current and previous phone numbers and addresses, Inaccurate account information, Accounts that do not belong to you and Late payments that should not be there.
TransUnion Experian Equifax
Check Your Credit Score
Your credit score is one of the most important factors when it comes to getting approved for a mortgage so it’s important to make your score is as high as possible before applying. Here are a few tips to help you increase your credit score quickly.
Pay down credit card balances – Your credit utilization ratio is the amount of available credit you’re using, it accounts for 30% of your overall FICO score. Try to pay your balances to less than 10-15% of the cards limit.
Do not apply for new credit – Do not apply for new lines of credit, credit cards, or loans. When you apply for credit a hard credit inquiry is reported to the credit bureau which will lower your score, you’re also adding debt to your report which can negatively affect your scores.
Pay all your bills on time – It is always important to pay your bills on time, every time. But when you’re going to be applying for a mortgage soon it’s imperative you do not have any new late payments. Set up auto pay which all your bills so you ensure you stay on top of your bills.
Get Pre-Approved from a Bank
Before you start house hunting you need to get pre-approved for a mortgage and speak to a lender. A loan officer will check your credit and verify your income and assets with your W2’s, tax returns, bank statements and paycheck statements. Most realtors will not even start showing your houses before you have a pre-approval letter in hand. Most sellers won’t accept offers that do not come with pre-approval letters.
The process is quick and easy, usually you can be pre-approved in a matter of minutes. Documents that you will need are 2 years of tax returns. W2’s and Paycheck stubs, 2-3 months of bank statements and Proof of down payment.
Understand Your Down Payment Options
The amount of the down payment needed to buy a house will depend on the type of mortgage you get. First time home-buyers typically have less money in savings which is why low and no down payment home loans are so popular. FHA loans require just 3.5% of the purchase price as a down payment making them an attractive option for first-time buyers. If you do have at least 20% for a down payment then you can avoid mortgage insurance by using a conventional mortgage.
Here are the down payment requirements for each type of home loan
FHA Loans – 3.5% with a 580 credit score
VA Loans – No down payment USDA Loans – No down payment 203k Loans – 3.5%
Conventional Loans – 5% – 20%
Know Your Debt-to-Income Ratio
DTI, or your debt-to-income ratio, it is the amount of your monthly income compared to your monthly debt payment obligations. This includes items such as credit card payments, car loans and all other loans. Front-end DTI ratio is your ratio of income to debt payments before adding a mortgage loan.
For example if your gross income is $5,000 per month and your total payments comes to $1,000 per month you have a front-end ratio of 20%. The max this ratio should be is 28%. Back-end DTI ratio is your income compared to your debt payments after factoring in the monthly mortgage payment. For example if your pre-tax income is $5,000 and your debt payments including your mortgage loan comes to $2,000 your back-end ratio is 40%. This should be 41% or lower, however in some cases this ratio can be as high as 50%.
Buying a house for the first time doesn’t have to be scary – make sure you work with a reputable loan officer and the process should run smoothly. Check your credit score, hire a good realtor, compare loan offers from multiple lenders and don’t apply for new credit during the home buying process.
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