In the current economic climate, getting approved for a home loan can be confusing and difficult for first time home buyers. However, with some knowledge and some preparation, young adults can obtain home mortgage loans and purchase property. To better prepare younger loan applicants, here is a list of five things that lenders will consider when determining whether or not to fund a loan for a us 20-somethings:
1. Down payment
Today, lenders expect borrowers to put down more money toward the home purchase. For conventional loans, borrowers should anticipate a down payment of at least 3%-5% of the property’s purchase price, although some lenders may require down payments as high as 20% or even 25%. The higher your down payment, the more at ease lenders will be about lending you money, and the more inclined they’ll be to offer you their lowest mortgage interest rates. Young adult borrowers who cannot afford to make a sizeable down payment should consider putting off their first home purchase until these funds can be acquired.
2. Save, Save, Save
In addition to down payment, lenders are much more likely to approve younger borrowers with money set aside, either in a savings account or in assets, to cover any unexpected emergency situations. This money may be used to make mortgage payments during times of unemployment, periods between employment, and financial hardship. Without some money stored away in savings, young adult borrowers may find lenders reluctant to issue them a loan. If you haven’t yet, establish a savings account! Start putting away a small percentage of your paycheck every two weeks or whenever you get paid.
3. Solid Employment History
For young adults and college students, lenders will require proof of steady, full-time employment before approving you for a loan through pay stubs or previous income tax returns. Part-time workers may be perceived as a higher risk and might not qualify. Furthermore, self-employed borrowers will need to provide ample proof to verify stated income and to establish reliability. These entrepreneurs may be slowed during the approval process by requirements for additional tax returns and extra documentation.
4. High Credit Score
Let’s face it, a higher credit score will result in a lower mortgage rate and a more cost-effective loan. Typically, the lowest interest rates are reserved for borrowers with credit scores exceeding 740, far above the credit score range of most young adults. While qualification can still be possible with a FICO score within the 600 range, the smallest decrease in an interest rate can can result into tremendous savings over the course of a loan. Young adult borrowers should consider whether it would be beneficial and financially worthwhile to purchase a home immediately or wait several years to build up their credit history.
5. Diminishing Debt
You don’t need a zero balance on your credit cards to qualify for a mortgage loan. However, the less you owe your creditors, the better. Your debts determine if you can get a mortgage, as well as how much you can acquire from a lender. Lenders evaluate your debt-to-income ratio before approving the mortgage. If you have a high debt ratio because you’re carrying a lot of credit card debt , the lender can turn down your request or offer a lower mortgage. This is because your entire monthly debt payments — including the mortgage – shouldn’t exceed 36% of your gross monthly income. However, paying down your consumer debt before completing an application lowers your debt-to-income ratio and can help you acquire a better mortgage rate.
- Do not apply for new credit in the few months leading up to your mortgage application. Financial institutions get suspicious if it looks like you’re piling on the new credit.
Are you a home owner in your twenties? What was getting your first mortgage like? What did you learn?
Until Next Time,