Owning your own home can provide you with the financial freedom that will help you live a better life. However, if this will be your first mortgage, you’ll have to prepare yourself for a strict approval process. Following the housing crisis that lead to the 2009 recession, lenders have become more concerned about who they qualify for loans. You can overcome this challenge by preparing your credit profile in the following ways.
Proof of Income
This is the first hurdle you’ll have to overcome in getting a new home loan. It will be a little easier if you’re traditionally employed because you can just provide your paycheck stubs for the most recent 24 months. However, this becomes a little more complicated if you’re self-employed or a freelancer. In this situation, you may have to provide copies of your income tax returns for the previous two years. The lender will either take the average of your income from those returns or accept the lowest income between the two returns.
Your credit score will have to reflect a good history, so, if you have a score below 620, you should start working on getting that raised immediately. Ideally, your score should be between 760 and 850 to ensure you can get approved more easily. The higher score will also help you lock in a lower interest rate, which will save you significantly on your monthly mortgage payments. To raise your credit score, avoid making late payments, and reduce your income to debt ratio. You can also use a secured credit card to help you establish a better credit history.
Proof of Liquid Assets
Lenders will also want proof that you can afford the upfront costs of buying a home. This includes a down payment that’s equivalent to 20% of the home’s selling price, although some government programs will accept a 3% down payment. You must also show that you have the resources to pay the closing costs and administrative fees associated with a home purchase. To prove you have access to the necessary funds, you’ll need to provide a checking account, investment account, and other savings account statements.
While it’s not impossible to get a home loan, it will require plenty of pre-planning to ensure you’ll present a good risk to lenders. This includes raising your credit score as high as possible and making sure you meet all of your financial obligations on time. If you can meet these demands, you’ll have a better than average chance of getting that pre-approval.