Those following the news in recent months are probably well aware that interest rates continue to hover just above rock bottom. This is great news for Minnesota homebuyers! But getting a mortgage isn’t as easy as just walking into a bank. Here’s what you’ll need to do to qualify for a home loan.
Run Your Credit Report
Be sure to run the credit reports of anyone who will potentially be listed on the mortgage, and do so with all three credit bureaus. Credit scores are one of the most crucial elements that lenders evaluate before you qualify for a home loan. Credit scores range from 300 (poor) to 850 (excellent). You’ll usually need a minimum credit score of 620 to qualify for a mortgage, but 740 and above is a better target for favorable loan terms.
Save Up for a Down Payment
In especially hot real estate markets, like the Twin Cities, homebuyers may find themselves in bidding wars. One of the best ways to secure an accepted offer – and to qualify for a home loan – is to have a substantial down payment. Sellers are usually more confident accepting an offer that has a 20% or more down payment because these deals are typically easier for banks to finance.
Saving for a large down payment also has the added benefit of making an otherwise unaffordable home affordable to a home buyer. For instance, if a Minnesota homebuyer only qualifies for a $200,000 mortgage but falls in love with a $265,000 home, having a large savings to draw upon may enable this person to purchase the more costly home under the same loan terms.
Research Mortgage Programs
It may seem as though all banks are offering relatively comparable terms for mortgages, but there are nuances that a person should take in to consideration. For one, even slight differences in interest rates can make a big difference over the lifetime of the loan. Second, two banks that offer the same exact interest rates may have different costs baked into the loan agreement, such as origination fees.
Determine Which Type of Financing is Best for Your Needs
After investigating your credit score, accumulating your down payment, and evaluating the nuances lenders’ various mortgages, it is now time to determine which loan program is best for your needs.
Perhaps you have a small down payment. In this case, a Federal Housing Administration (FHA) loan might be your best path forward. FHA loans only require borrows put down 3.5% as a down payment. Military veterans may be eligible for low-cost, 0% down loans through the Veterans’ Administration, a loan program that does not require borrowers to pay PMI, though there are other restrictions to consider.
Get Pre-Qualified for a Loan
One of the first steps in qualifying for a mortgage is getting pre-qualified for a home loan. A pre-qualification is not the same as a hard commitment from a bank. Instead, it is a bank’s general analysis of your ability to afford a mortgage of a certain amount. This will help steer you during your house hunt, since you will know what price points you should be considering. Having a pre-qualification letter in hand is also beneficial when putting an offer in on a home, as the sellers will want to know that a potential homebuyer is serious and can afford the price they have offered.
Find Homes within Your Budget
Now that you know what you are pre-qualified for, begin your home search in earnest. You may realize that the homes you have been browsing online are well outside of your price range. This may mean looking outside of a desired neighborhood, or even putting the search on hold while establishing a larger down payment or improving your credit score.
Qualifying for a mortgage nowadays might be more complicated than ever before, but with proper planning, buying a home is well worth the effort.
If you’re interested in learning more about how to qualify for a home loan, or if you want to get started on your home search, give our friends at MN Realty Guide a call. They’d be happy to talk you through the process and they’re among the top realtors in the Twin Cities metro!