The time has finally come; you’re ready to buy your first home. You’re thrilled to have a space of your own to do with as you please. You can paint the walls any color you want, you can hang up a shelf in the bathroom without violating your lease agreement, and best of all, you can finally get that dog! 🙂
While this is all incredibly exciting, however, moving forward in the buying process can also be a bit overwhelming.
I was chatting with friend at the gym the other day, and she told me about the ups and downs of her current house hunt. While she’s thrilled at the prospect of owning her own home, she’s also a bit frustrated with some unexpected challenges. Namely, she and her husband have had some trouble securing a mortgage. And because of this, the home they thought was “the one” turned into the “home that got away.”
If you’ve purchased a home before, I’m going to go out on a limb and guess that you faced a few challenges during the process. Is that a safe assumption?
I thought so. You see, I’ve never met anyone who had a flawless home-buying experience.
With so many moving parts between finding a realtor, securing a loan, identifying the perfect home that fits your needs, working with the sellers, selling your own house, getting the house inspection, deciding on a closing date, and actually moving, obstacles are bound to pop up.
I know my husband and I faced our fair share of struggles between securing closing dates, an unreliable loan agent, and timing the move with the end of our apartment lease. Luckily, we had a great realtor, which made things much easier. (If you live in MA and are looking for a realtor, I highly recommend Karen Guderian. She’s fantastic)
After having this conversation with my friend, I was reminded of the emotional rollercoaster often associated with the entire home-buying process. You’re excited to take this next big step in your life, you’ve done your research, you’ve saved for a down payment, and then BAM, something goes wrong and suddenly it’s: “no soup for you.”
Because these are obstacles many of us experience at least once during the course of our lives, I want to share some strategies to help the process run as efficiently as possible. And to kick off the series today, we will start with the mortgage, and more specifically, how to get a home loan.
Top 4 Strategies For How To Get A Home Loan
Start With A Good Credit Rating
Simply put, a good credit rating (or credit score) is key. Why? Because it’s one of the main components that a lender uses to gauge your suitability for a loan.
Your score is determined by how you’ve handled debt in the past, so maintaining – or improving – your credit score should be a high priority on your list.
What makes for a good rating, you ask? Well, let’s take a look at the different factors that make up your score.
Types of credit
While it’s easy to think that “credit is credit.” In reality, not all credit is created equal. In fact, lenders weigh each type of credit differently, with some raising more of a “red flag” than others.
Commercial loans, for example, are not weighed the same as student loans. Just as student loans aren’t equal to credit card loans. According to FICO’s research, they’ve found that, “all things being equal, consumers with a ‘mix’ of credit types on their credit reports tend to be less risky than those who have experience with only one type of credit.”
Keep in mind, however, that this category (along with New Credit) holds the least influence on your credit score with an impact of about 10%. So if your loans aren’t perfectly mixed, don’t fret. Just keep in mind.
Just as it sounds, new credit means any accounts that you’ve recently opened. FICO has found that those who have started a new loan are more likely to miss payments. And because of this, opening new accounts can temporarily have a negative impact on your score. So if you’re planning to apply for a housing loan soon, you might hold off on opening any new accounts or making any big credit card purchases; you want to keep your score as high as possible during that time.
Think back… How long have you been borrowing money from one source or another? Months? Years? Decades? Even if you’re completely on top of your debts at the moment, most creditors will look back into your credit history, and FICO breaks down this information into three categories:
- How long accounts have been open.
- The length a specific account types have been open.
- How long it’s been since those accounts were used.
Generally, the longer your account has been open, used, and kept in good standing, the better your credit score will be.
The amount owed represents your entire outstanding debt: student loans, credit cards, car payments etc. So perhaps not surprisingly, this component makes up a significant portion of your credit score.
In addition to looking at the size of debt, the credit score also takes into account how quickly you’re paying that debt off. And it goes without saying that the quicker you pay it off, the more your score improves.
So as often as possible, avoid taking the “minimum payment” option on your credit card bill. It only results in increased interest, which in the long run, makes your debt that much harder to pay off.
Finally, we come to the most important aspect of your credit score. Making up 35% of your overall rating, the biggest deciding factor lies not in your borrowing, but rather your track record of repaying outstanding debt.
Perhaps counterintuitively, a strong a history of repaying debts quickly and efficiently is often more beneficial than going through life with no debt at all. You see, when you provide lenders with a consistent track record of paying off bills, you also tell them that you’re a safe bet. As Heather Battison, vice president at TransUnion explains, “That is why it is imperative to pay off debts on time and in full each month.”
Save For That Downpayment
While a good credit rating is one of the biggest players in securing a home mortgage, a sizable downpayment can help quite a bit as well. Of course, this is easier said than done when the average savings account yields a threadbare 0.01% APY.
If, however, you’re serious about buying a home, saving a sizable downpayment combined with a strong credit score is one of the best things you can do.
So what are some strategies to save for this major investment?
First, consider changing your savings account
Spoiler alert: savings accounts don’t accumulate money quickly. At all. And this is especially true if you’re using a standard brick-and-mortar bank.
According to Forbes.com, however, online lenders have fewer overheads than the traditional bank, and thus have much more competitive interest rates. So if you’re looking for a way to get more “bang for your buck,” you might consider looking into online banking as an option.
Save the windfalls
Anytime a bit of extra money comes your way – a tax return, a year-end bonus, a commission check, the money from your side hustle – put that money directly into your savings. Then, don’t touch it. Those sporadic paychecks add up quickly, and they help push you toward your goal that much faster.
Automate your savings
I talk about this tip more in depth in my “4 Strategies to Save Money For a Big Purchase” post, but I’ll give an overview here.
Essentially, set up your direct deposit to put a portion of your paycheck into savings automatically each pay period. It’s a great way to save without missing the money. Because when you don’t have it, you can’t spend it! (If you want to read more about this strategy, you can check out my post here.)
Become an investor
While it’s not without its risks, investing alongside your savings can generate significant money as well. I definitely recommend doing research before jumping on this option. But Forex (recommended for new investors) or cryptocurrencies can help speed up your savings plan if you invest wisely.
Please note, however, that I am not a financial advisor, nor do I have any expertise in investing. So be sure to do your research and consult a professional before taking this big step. 🙂
Be mindful of your job status
If you recently changed jobs or you have been self employed for under two years, lenders often take pause. Why? Because depending on the type of loan, there are different requirements for consistent employment.
If you’re applying for an FHA loan, for example, you should have a strong employment history for two years. Additionally, as Kyle Hiscock explains, “If there are gaps in employment history, [lenders] require a written explanation, which is subject to the approval of a mortgage underwriter.”
So if you’re pre-approved for a loan, and you’re considering a change of employment, Hiscock advises checking with your mortgage consultant before you make that change.
Pay off those bills!
I know, sometimes it’s tempting to leave your bill payments until the last minute. Unfortunately, lenders are not a fan of this strategy. To them, an unpaid bill is a debt, and they treat it as such. That means you should, too. So make sure that you pay your bills promptly to maintain a good credit score and increase your chances of securing a home loan.
Have you been through the home-buying process? Did you run into any obstacles along the way? Do you love Seinfeld? Let me know below!