If you’re in the market to buy property, it’s likely that you will need to borrow to fund it. But some people don’t even know the first thing about getting a housing loan. As it is, buying a new house is already stressful and not knowing if you’ll get approved for a loan only heightens the anxiety. Here are 8 easy steps to maximize your chances:
Evaluate Your Financial Capacity
The best way to do this is by starting the conversation early with your potential lender. Typically, your lender will ask about your assets, monthly income, liabilities, and projected down payment. The secret is to put yourself in the position of lenders and evaluate the three things they consider when assessing home loan applications: your income, your credit history, and your debt service ratio (or the portion of your monthly take-home pay that will got to your monthly amortization).
Clean Up Your Credit History
Some borrowers never review their credit history before submitting a home loan application and just assume that previous non-payments are forgotten. Whether the non-payment is from another bank or the lender where you are hoping to get a loan, this assumption is a mistake. Banks and other lenders typically share information on delinquent (non-paying) borrowers and history of non-payment is a big red flag for lenders.
Clean up your credit history by paying bills on time, eliminating credit card balances, and, if you have unpaid loans, pay them off and get a certificate of payment from the lending institution. Be sure not to mess up your credit during the loan processing as diligent lenders sometimes check your credit history a second time to see if anything has changed.
Read more: I Can’t Pay My Credit Card Bill—Now What?
Lenders avoid risky clients so put your best foot forward by being financially stable. You will need to maintain a stable cash flow and avoid new debt. Sticking with your employer while going through the home buying process is crucial. On the other hand, taking a lower-paying job or quitting to become self-employed is a red flag for lenders and could delay or stop your application altogether.
While you don’t need a zero balance on your credit cards to qualify for a housing loan, the less you owe your creditors, the better. As a rule, avoid any major purchases—like financing a new car, co-signing another loan, or going on an expensive trip using your credit card–until after you’ve secured the loan.
Use a Mortgage Calculator
Mortgage calculators are great tools to check if your finances can really handle the payment scheme. They can show you how much your monthly mortgage payment would be under a different home price, interest rate, loan tenure, and annual income scenarios.
Check What You Can Spend
Use calculators and analyze your finance to find out what you can actually spend before bidding on properties. It’s hard to fall in love with a ‘dream house’ that you can’t afford. Going through this process can save you a lot of emotional and financial stress moving forward.
Beef Up Your Savings Account
Walking into a lender’s office with zero cash is a quick way to flush your loan application down the drain. Aside from improving your credit position, a huge savings account can help you pay off a variety of cash expenses. Remember, lenders are cautious. If you’re planning to apply for a home loan in the near future, be ready to cough up some cash for down payments.
On average, you’ll need at least 20% of your home price for down payments but you should aim for a higher downpayment to lower your total mortgage balance. Note that downpayments aren’t the only cash expense you need to worry about. Getting a home loan also involves home appraisals, title recoveries and other expenses in the processing of your mortgage.
Prepare All Required Documents
No mortgage lender will take you on as a customer unless you can prove who you are. Make sure that you have an up-to-date ID and that the address on all your IDs are correct.
You will need to provide your lender with a lot of financial documents so make sure that you compile them before starting your application. At minimum, you need a valid (photo-bearing government issued) ID, proof of income (employment certification, ITR, or payslips), and other relevant collateral documents. You may need to provide additional evidence of your earnings if you’re self-employed.
Be Prompt in Responding to Your Lender
After submitting your application, it’s important to open your communication lines so that you can respond to any requests for additional information from your lender. Waiting too long to respond can cause a delay in processing your loan, or worse, blow up your application entirely. After covering all your bases at this point, it’s best not to put yourself in a position to bungle your application—losing your dream home as well as any deposit you may have put down.
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