Prepare Before Applying For A Home Loan

Posted by Phylis Decourcy-Powell

July 24, 2010

If you are in the market of buying a new home, you are probably going to need a home loan. Applying for a loan is not something that should be done on impulse and there are many things that you can do to prepare yourself for the process. Having all of your information ready before the bank asks for it will greatly increase your probability of success.

The most important thing that you can do is to make sure that you can afford to buy a house. Establish a budget of all incomes and expenses without a mortgage payment. Do not forget to put costs of food, gas, auto loan payments, insurance premiums, or any other regular bills into the budget. There are a wide variety of resources available online and at local financial institutions to help you make budgets.

After you have determined your budget without the house, include the mortgage and typical homeowner expenses into the budget. Some of these costs include utilities, property insurance, homeowner association dues, and other bills that you probably do not have now. It will also be important that you set aside money monthly for unexpected repairs.

Most financial experts agree that prospective homeowners should start planning at least six months before starting the loan process. This time can be used for a wide variety of tasks, such as cleaning up issues on your credit report, conducting research, and planning. Buying a home and even applying for a home loan is a serious investment and should not be taken lightly.

It is imperative that you know your credit score and fix any discrepancies. Most financial institutions are looking for borrowers with a credit score above 650. The risk of missed payments and defaults significantly increases with scores below this mark, so most major banks will be hesitant of loaning money to these individuals. If the loan is approved, borrowers with lower scorers will usually be given much higher interest rates.

What can you do to increase your credit score? The best thing that you can do to increase your credit score is to pay down your credit. If there are negative or bad things that need to be removed, contact the credit company and come to a resolution. Keep all documentation regarding the matter and allow for up to 60 days for it to clear your credit report.

Most first time buyers do not know that banks will decline loans if the down payment comes from a one time source of income, such as another loan, money from family, or a bonus. This is because they believe that if you cannot afford to save enough for the down payment on your normal income, you cannot afford the house. As proof of down payment sources, the lending bank will usually require up to six months of statements regarding the account the down payment money was saved. If you get your money from a one time source, make sure that you deposit it before that six months and continue to make regular deposits into the account.

There are many things that you can do to ready yourself for a home loan. Doing your research and being prepared is paramount and will drastically increase your chances of getting approved for a home loan that you deserve.

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