Things That You Should Avoid Before Applying For A Home Loan

Necessities for Home Loan Application

Nowadays its harder to qualify for the home loan. According to new regulations lenders require to verify every aspect of the borrower’s financial background, before giving out loan. So, if you need loan it’s important to prepare well so that you become a good candidate to get loan. The market is flourished with different home loan offers with varying perks & interest rates.

Being a borrower one should avoid doing anything that will in-turn harm your chances of getting approved for loan. Here are things that one should avoid before applying for the home loan.

1)         Don’t take out other loans

Your student, auto & personal loan have one thing in common that is they increase your total debt load. They can also affect your chances of being approved for a home loan.

When you apply for a home loan the lenders will consider the total amount of debt you have at that point in time. Your monthly recurring dept will be compared with your gross annual income by the lenders. This is called as debt to income ratio or DTI. In the current lending environment, DTI has become one of the most important qualification requirements for the borrowers. So, it is important for you to increase your DTI ratio before applying for the home loan. It can impact your chances of getting your loan approved.

If you are planning to apply for a home loan in near future, try to avoid taking other loans or credit lines. At the least, put them off until you have been approved for the home loan.

2)         Racking up the debt of credit card

We have just discussed the importance of debt-to-income ratio when applying for a home loan. Your different credit card balances are also included in this calculation. Too much credit card debts are the most common reason for home loan rejection nowadays. You become more of a risk, in the lender’s eyes.

Generally, you should limit the use of the credit card before applying for a home loan. Rack up the additional dept by using those cards will drive up your debt-to-income ratio. It will, in turn, lower your credit score by increasing your credit utilization ratio. This is on of the factor that will influence your credit score.

3)         Don’t miss credit payments, car payments etc.

The credit score is used as a risk-assessment tool by the lenders. Higher the credit score lowers the risk for the borrower. And the reverse is true lower the credit score higher the risk for the lender. So, as a borrower, you must do everything possible to protect your credit score when shopping for the home loan.  Your payment history will account for 35% of your total score which is more than any other single factor. A single late payment can drop your score by 50 points or maybe more depending on the circumstances. So, try to avoid missing payments.

4)         Blowing your savings

You will encounter out of pocket costs when you are using the home loan to buy a house. First of all, you need to consider the down payment. If you are using a VA or USDA home loan (both of which offer 100% financing for borrowers), you will have to make some down payment. It will be 3.5% for FHA loan, & 5% to 10% for conventional financing. You will also encounter closing cost this can be thousand dollars beyond the down payment.

If you are viewed as a higher risk for some reason, lenders will want to see cash reserves in your bank account.

Saving as much money as possible will contributes in increasing your chance of qualifying for a home loan. Before buying a home, loan try to avoid large purchases that will, in turn, deplete your savings. It is always tempting to plan an outdoor vacation or buy a 64 inch LCD TV you have always wanted. But these things chip away at your cash reserves. Try to avoid such purchases until after you’ve qualified for the home loan

5)         Job Changes, or taking leaves

The home loan will also be interested in knowing the history of a steady employ & income. Most of the lender will require a steady employment for minimum 2 years. If you are receiving your income from some non-employment source this will be a moot point. But for a typical buyer employment will be the key qualification point during the home loan application process.

If you have changed your jobs within the same field, but have secured an equal or greater level of income, you will not have problems. But if you go through a major career change & your income decreases from your previous position you will have to face problems during the home loan application process.

 

You have to maintain the status quo, as far as your employment is concerned. Many times, you will not have a control over such things. But you can postpone your career changes until you receive your financing— unless it gives you a big fat pay increase.

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