Buying a house is the biggest investment most of us make in our lives. This can lead to a lot of anxiety around the decision, which is only heightened by not being prepared.
Qualifying for a mortgage loan is a major part of the homebuying process. In this piece, we’re going to help you ensure that you get the loan you need.
Be aware of your credit score
It takes almost no time to get your credit report. However, some potential homebuyers don’t review their credit scores, instead simply assuming their score will be high enough to qualify them for a mortgage loan.
Most lenders require homebuyers to have a minimum credit score of 680. A low credit score leads lenders to believe that you have a history of defaults and late payments. They’ll consider loaning you money a high-risk expenditure. If you do get a mortgage loan on a low credit score, your lending company is likely to charge you a high interest rate.
Build up a good credit score
A low credit score can lead to mortgage application rejections, since this is an indicator of delayed or defaulted payments. You can build a good credit score by:
- Paying your credit cards off in full each month instead of just making the minimum payments. If you have credit card debt in multiple accounts, you should target the one with the highest utilization rate.
- Using your credit card for small purchases. A good rule of thumb is to make sure you don’t spend more than 30% of your overall credit card limit.
- Spacing loan requests over time. If you’ve applied for several loans at the same time, it makes you a much less viable borrower.
- Having a good mix of credit types and paying them off on time.
- Not opening any unnecessary credit lines. These can leave you in debt if you’re not able to pay them off in full.
- Building your credit history if you don’t have any yet. Your credit history makes up 35% of your overall credit score. Talk to a local lender and get the credit card with the lowest interest rate available. Use it to make small purchases and pay the amount in full each month.
Keep cash on you
Many homebuyers are surprised by this, but you have to have cash ready if you’re applying for a mortgage loan. Lending institutions require homebuyers to make a down payment in cash.
The amount depends on the lender and the type of loan they’re offering you. You also need to pay closing costs before the deal is sealed, and this costs typically between 3 and 5% of the total mortgage.