WEOKIE Federal Credit Union By WEOKIE Federal Credit Union • November 15, 2019

How to Know If You're Ready to Apply for a Home Loan

Buying a home is not for the faint of heart. There are countless forms to complete and papers to sign, not to mention credit checks, property inspections, offers, and counter-offers. 

One of the biggest parts of the process is applying for a mortgage with a lender. Here at WEOKIE Federal Credit Union, we take pride in helping our members apply for home loans. 

Some of our members wonder if they’re ready to apply for a home loan. That is a great question to ask. Nothing is more frustrating than getting your hopes up about buying a new home only to realize that you don’t qualify for a mortgage. 

We have several ways you can know whether or not you are ready to apply for a home loan, but first, let’s consider the problems that people often encounter when applying for a mortgage.

What are the most common reasons people may not get approved for a mortgage?

Knowing and understanding why some people end up getting declined is a good first step towards knowing if you are ready to apply.

The Home Buyer’s Institute cites four main reasons for being turned down for a loan: 

  1. Your credit score is too low.
  2. You have too much debt.
  3. You are asking for a loan that is too large in comparison to your income.
  4. You lack a sufficient down payment.

The first thing to do before applying for a loan is to make sure that you are not going to end up experiencing one of those mortgage pitfalls! 

Now let’s move on to what you need to know before you apply. 

Do you have a plan to save for a downpayment?

There are several ways to approach a downpayment. Historically, the advice has pretty much always been the same: You need to have 20 percent of your home’s price as a downpayment. However, it’s not always that straightforward.

NerdWallet explains: “For first-time home buyers, the challenge of coming up with a 20 percent mortgage down-payment is often difficult enough to keep them out of the market. But the 20 percent down-payment is all but dead—and has been for quite some time, especially for first-time buyers.”

It goes on to explain that the median down-payment percentage for new homebuyers was seven percent, and repeat buyers were putting down a median payment of 16 percent. How is this possible, considering the 20-percent rule? 

Essentially, there are several different types of mortgages out there, and first-time homebuyers are typically able to benefit from the options that allow them to have a smaller down-payment. Even so, the old wisdom is still useful: The more you can save for your down-payment, the better off you will be in the mortgaging process. You may be eligible for lower interest rates, special financing perks, and lower PMI (private mortgage insurance). 

Before applying for a loan, ask yourself: Do I have enough money saved for a down-payment? 

Do you have your paperwork in order?

In a previous post, we discussed the importance of keeping your paperwork in order before you apply. 

These are the items recommended to have on hand: 

  • Bank statements for the past three months
  • Documents related to any current lease or loan you are responsible for
  • Three years of income tax returns
  • Two to three months of pay stubs from your job, or a W-2
  • Letters from anyone (such as a family member) who is giving you money towards your home, stating that the money they are providing is NOT a loan

Before applying for a loan, ask yourself: Do I know where to find all of the paperwork I will need when I apply? 

What is your debt-to-income ratio? 

The simplest way of understanding debt-to-income (DTI) is that it is a useful number that compares the amount of your monthly debt to your monthly income. 

You may have heard the magic number of 46 percent, which is that no more than 46 percent of your monthly income should have to go to debt. However, many lenders actually prefer 36 percent or lower. Ideally, your mortgage will only take up 28 percent of your DTI ratio. 

Knowing your DTI will help you prepare to apply for a mortgage. If the percentage is too high, you can begin to work on strategies to improve it, either through paying off debt or increasing your income. 

Before applying for a loan, ask yourself: Is my debt-to-income ratio where it needs to be? 

Once you’ve answered these questions

If you have looked into these important questions and found that you are ready to apply for a mortgage, let’s talk! 

Don’t forget to ask about the special bonuses we are doing this year to celebrate our 50th anniversary! You can also check out our eGuide, which explains what you should be doing today to prepare for a mortgage loan. Download the guide today to learn more, or give us a call at (405) 235-3030 or 1 (800) 678-5363 to discuss and strategize your financial goals today!

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