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At some point in most people’s lives, there might be a need to get a loan for some large purchase. It could be for a house, a vehicle, or a business. Irrespective of your current financial status, it’s beneficial to have some fundamental knowledge to guide you before you submit an application.
One of the most essential steps to take before you apply for a loan is to ensure you’re financially stable and have got a good credit score. Even if your credit score isn’t too good, there are several moves you could make that’d improve the possibility of the loan being approved. From paying down debt to searching for some type of lender, with the right step and information, you can up your chances of getting your home loan. Let’s dive into some tips you can explore to get approved.
Table of Contents
- 1. Get To Know Your Credit Score
- 2. Research Lenders That Best Fits You
- 3. Speak With A Financial Advisor Or Mortgage Expert
- 4. Do You Know Your Debt-to-Income Ratio?
- 5. Provide a Guarantor or Collateral
- 6. Pay Up Existing Debt
- 7. Cut Down Your Expenses
- 8. Prove Your Ability To Repay Your Debt
- 9. Be Careful Of Your Credit Card Limits
- 10. Don’t Make Any Major Career Change
- 11. Save As Much As You Can
- 12. Have a Buffer
- 13. Don’t Submit Applications With So Many Lenders
- 14. Be Honest And Don’t Leave Important Details Out
- 15. Get Prequalified Early
1. Get To Know Your Credit Score
Whether you’re trying to get a loan or not, it’s always a great idea to have some knowledge about your credit score. If you’re getting a loan, it’s very important you know it. A credit score of 760 and above is considered good. You need to ensure all your information is correct and that your identity hasn’t been altered. Having a good credit score increases your chances of getting a loan and would help you determine a great offer.
Another reason why it’s necessary to regularly check your score is so you can be certain there are no errors on the credit reports. When you notice discrepancies, it is up to you to contest the mistake on your credit report to avoid any mishap. Monitoring your credit report regularly can help ensure your credit information doesn’t fall into the wrong hands and get lenders to consider you.
2. Research Lenders That Best Fits You
When you’re able to get the right lender, it might not matter whether you’ve got a great credit score, you may still qualify for a loan. Some lenders might loan smaller amounts of money to people in the process of rebuilding their credit scores.
Most banks will turn down loan applicants whose credit score is below 700, however, there are several smaller financial institutions that would still be willing to offer you money. Community banks and local credit unions inclusive. You can consider searching for online lending platforms.
Wondering how you can find a lender that fits you? Consult with people who have been in similar situations like you; there are forums online that’d be helpful. Recommendations from your loved ones or colleagues at work can set you on the right path.
3. Speak With A Financial Advisor Or Mortgage Expert
Whether it’s your first time buying a home or not, speak with a financial advisor before you apply for a loan, it’s important that you understand your finances. Have a sit-down with an expert and see what you can afford.
That way you have an idea of what to work towards and also know the down payment requirements for the type of mortgage you’d choose and the lenders’ too. After you’ve successfully gotten the home loan, you can use a mortgage calculator to figure your monthly payments, insurance, interest, or taxes. As time goes on, you’d be familiar with the whole process.
4. Do You Know Your Debt-to-Income Ratio?
It is the ratio of how much debt you owe with respect to your total income. If you’ve got a high debt-to-income ratio, that’s a civilized way of saying you’ve got big money issues and can’t pay your debts. In other words, you have a large amount of debt compared to your current income.
When the bulk of your income is spent paying debts monthly, the chances of being eligible for a loan are quite low. Financial institutions want to be sure that you’re able to pay back what was loaned to you conveniently. This isn’t the same with your credit score; a high debt-to-income ratio is a big red flag for most institutions.
However, when you are using less than say 40% of your income to pay debts monthly, you improve your chances of being approved for a loan. Kindly note that this includes debts and not your falling short of regular bills like utility must have means and will to pay back your loan to improve your chances of approval.
5. Provide a Guarantor or Collateral
One way to be eligible for a home loan when you’ve got a high debt-to-income ratio is to provide a guarantor/co-signer or collateral. Your collateral should be of significant value compared to the amount of the loan you’re applying for and the cosigner should be someone of good standing and report.
Also, if you have zero credit history, note that most lenders are not always willing to grant loans to applicants with almost little to no credit history. This can be sometimes resolved when you’ve got a cosigner who has a very good credit history, credit score, and low debt-to-income ratio.
There’s a catch, however, the cosigner is responsible for the repayment if by any chance you can’t pay back. Remember this when you want to ask an acquaintance to help out. The cosigner can’t be anyone, they have to be someone you trust completely and they, you.
6. Pay Up Existing Debt
One of the easiest and fastest ways to improve your approval chances of a loan application and even credit score is to pay any existing debt; especially when your credit card balance is high coupled with a high utilization rate. This can significantly lower your score if left unchecked.
Even though paying a large debt can be draining for some people, there are several ways that can help you do that efficiently without having to squeeze out every dime with you. You need to be willing to make certain sacrifices to make it happen; not too much but ones that would certainly produce results.
7. Cut Down Your Expenses
If you want to be approved for a home loan you need to cut down on your expenses. Most lending companies would want to see at least three months’ worth of living expenses. It would be a good idea if you can critically examine your expenses by assessing the credit card and bank account statements no less than 6 months before you apply for a home loan. Try and rectify spending habits that you perceive might hinder the chances of your loan being approved.
That quick coffee and pay after purchases would seriously affect your chances of being approved for a loan, therefore, you need to work on reducing excessive spending.
How do you do that? Take the bus to work instead of ordering a ride, shop at your local grocery store, and avoid online shopping. You would save more money and make you look good when your lender takes a look at your bank statements.
8. Prove Your Ability To Repay Your Debt
Lenders need to be able to see that you can pay back your home loan. It is much like the most critical requirements you have to meet to get approved. They don’t want to see a budget you’ve written down, they’d rather look at your current expenses and financial records.
You need to be ready to discuss all that involves your finances. Which includes but isn’t limited to your source of income, savings, investments, debts, and expenses.
What your lender wants is to prove that you can pay back by showing a clean track record so when assessing your loan application, your credit rating represents you as a good borrower. Don’t apply for a home loan when you’ve got a series of late/ missed payments; your application would likely land on the rejection pile.
When your track record shows you meet deadlines and are diligent, you prove to them that you’re a worthy risk.
9. Be Careful Of Your Credit Card Limits
This can’t be overemphasized enough because when banks are assessing your loan application, they tend to assume that your credit limit is how much you owe. So, for instance, you have a credit card with a $5,000 limit but you don’t use it or don’t have outstanding payments, the bank will assume that money is how much debt you owe.
If your credit card limit is high, your lender won’t be able to lend out so much money to you the less money a lender can responsibly lend out to you. A better solution for you would be to reduce your card limit or better still close it down before you apply for a home loan.
You have a much better chance of getting a home loan if you own a single credit card with a lower limit.
10. Don’t Make Any Major Career Change
Lending companies want to see stability; that it’s possible for you to hold a job. Which for them means you can pay them easily. Except you’ve got a large stash of money somewhere, it’s your current income that will be used in repaying your loans. They’d prefer to see you’ve been consistent with one employer for at least six months.
There’s nothing to worry about if you’ve just started a new job. They’d look at your previous record to see your former position. It’s usually great if you’ve been consistent at a particular role in the same industry for a minimum of two years
11. Save As Much As You Can
Lenders will love it if you’ve got a strong saving history and that you’ve also built up a deposit over time.
When you’ve got a strong deposit, you’re likely to borrow less and won’t need to pay lenders mortgage insurance. In essence, larger deposits mean less loan amount, which means less LMI and a reduced risk to the lender. You’re not likely to get turned down when you apply.
When you have to borrow more than 80% of the price’s property, you’ll need to provide evidence of savings. They must add up to make at least 5% of the asking price of the property to meet the bank’s savings requirements. Don’t forget buying a home is more than they deposit. You still have to pay for stamp duty and legal fees.
12. Have a Buffer
This is like what you’d do if your plan A doesn’t work out. Having a backup net in place is always a good idea, just in case your worst fears come to pass and your source of income stops.
13. Don’t Submit Applications With So Many Lenders
You don’t want to take any chances, right? That’s understandable and while it’s important to compare different lenders, applying to several lenders at a time will be shown on your credit report.
It doesn’t have any serious impact on your credit rating, but lenders don’t like it very much and it doesn’t look too good – especially when your loan application has been denied multiple times.
It’s a much better idea to compare all your options first, then apply for a loan once you’ve identified the right one for your needs.
14. Be Honest And Don’t Leave Important Details Out
Don’t try to cover up if you’ve got outstanding debts, it’d much better for you to disclose that information right from the start. Your lender would still find out one way or another and your loan application will likely be declined due to non-disclosure. They will question other information you’ve given them since they’re not sure whether more debts weren’t disclosed.
15. Get Prequalified Early
It is advisable to plan. You Get pre-qualified early so you can know what your credit is and the cost of purchasing a home in terms of down payment, closing costs, and other costs. As stated earlier, finding a lender is also an important part of the process, they can walk you through the process.
Buying a house is pretty much one of the most expensive things anyone will do after paying for their kid’s college tuition or buying a car. Getting a mortgage from a financial institution is commonly viewed as the best way to go. But the process isn’t always easy as it seems, especially if it’s your first time. There are several factors involved in the process; the tips listed here would go a long way in making your dream come true.