If you are buying your first home or refinancing, the home loan process can be overwhelming. From bank statements to interest rates, credit scores, and debt, there are many details to track during the home loan application process. Check out the dos and don’ts for a smooth loan journey below.
What to Do
- Do Build Your Credit Score
Banks use your credit score to assess your ability to pay your home loan. First, check your credit score using a simple tool like the credit report portal on www.valleystrong.com.
Pay all pending bills, limit requests for new credit, ask for higher credit limits, and consolidate debt to improve your credit score.
- Do Save Money
Home loans don’t pay for the entire value of your home. Instead, you have to put up 3% to 20% as a down payment, depending on the lender. The more money you have for a down payment, the less risk borne by the lender, and the higher chances of your approval. In addition to the down payment, save money for legal fees, insurance expenses, moving costs, maintenance, and mortgage payments.
- Do Get Pre-Approved
A mortgage pre-approval lets borrowers know how much money they can borrow from a specific lender. Usually, the lender checks your income, credit history, debt, and assets before providing a mortgage offer. Pre-approval keeps you from looking at properties you can’t afford and gives you the confidence to bid on homes that fall within your budget.
- Do Consolidate Your Financial Documents
Home loan lenders need various documents to approve your home loan. So, gather your bank statements, W2s, pay stubs, tax return documents, renting history, credit reports, and statements from investment accounts like 401(k)s.
- Do Work with Professionals
Working with a loan officer makes the loan application easier because they help you determine the kind of house you can afford and even connect you to reputable realtors. A home loan officer also works out favorable loan terms and gives you practical advice.
What Not to Do
- Don’t Apply for New Credit or Close Lines of Credit
Once you get pre-approved, don’t get a new credit card, don’t take out an auto loan, don’t cosign loans, or close lines of credit. These actions increase your debt and affect your credit score, making lenders hesitant to lend you money.
- Don’t Make Large Purchases
If you are buying a new home, you may start buying things you need before you close on a property. However, avoid making large credit purchases for furniture, appliances, or other items as it increases your debt-to-income ratio and lowers your credit score. As a result, your lender may require a larger down payment, increase your interest rate, or disapprove your loan application.
- Don’t Move Money Around
Home loan lenders require statements from your liquid assets to evaluate your eligibility. If you withdraw and deposit large amounts from your bank accounts during the home loan application process, the lender may assume you are using some of your down payment or that you took out a loan.
Lenders must document a paper trail on each loan, and large withdrawals and deposits only complicate the process. If you must move money around or receive funds from family to buy a house, be prepared with legit documentation.
- Don’t Switch Jobs
Home loan lenders love stability, and quitting your job casts doubt on your ability to make mortgage repayments. Most lenders also contact employers when processing home loans, and any uncertainty about your job’s stability may lead to denial.
If you intend to quit your job for self-employment, wait until the closing process is over. Typically, lenders check a history of business income for two years before lending home loans. However, positive job changes, like promotions and raises, improve your eligibility for a home loan.
Summary
Keeping these guidelines in mind simplifies your home loan application and gets you into your dream home quicker. Most importantly, consult a loan officer to avoid delays.
