Feeling intimidated as you get ready to apply for your first home loan? There’s a lot of misleading information about mortgages out there that can cause unnecessary stress for borrowers. It’s important to know what’s true and what isn’t.
In general, if you have a good credit history as well as substantial income and savings, you should be in good shape. Now, let’s look at some of the most common home loan myths to be aware of:
Just because you don’t have a 9-5 job doesn’t mean you won’t qualify for a mortgage. There are plenty of contractors, freelancers and self-employed individuals with home loans.
The big difference between them and those with more traditional, full-time jobs is the process of proving income. If you’re a freelancer, you won’t have the standard W-2 form to provide to the lender. Instead, you can provide other financial documents, such as bank statements or tax returns.
As long as you have enough income to satisfy your monthly payments, you’ll most likely be qualified for a mortgage. Possessing student loan debt doesn’t change this, though it might make the process more difficult.
The most important factor to consider is the history of your student loan payments. If you’re currently behind on that loan, the lender might see your home loan is riskier. This can lead to a larger down payment and higher interest rates. Before applying for a home loan, you’ll want to make sure that you’re up to date with any other loans in your name.
In most cases, you can have a friend, family member or other trusted entity make the down payment for you in the form of a gift, so long as you meet certain requirements. For example, if you’re applying for a loan that’s backed by Fannie Mae or Freddie Mac and you’re putting less than 20% down, the entire down payment can be a gift. Though, if you’re planning on putting down more than 20%, expect to pay a portion of it out of your own pocket.
Once you’ve determined where the gifted funds are coming from and how much they’ll cover, you’ll need to write a down payment gift letter and send it to the lender. There’s no standard form to fill out, so consider getting help from your real estate agent. When writing the letter, you’ll need to provide information about the person providing the gift, such as your relationship to them and where exactly the money will be coming from (i.e. checking accounts, investment accounts, etc.)
If you have enough money to put 20% down, you’ll enjoy certain advantages, such as lower monthly payments. However, it’s rarely required by lenders. In fact, the average down payment for a home loan in the U.S. is only 6%.
It’s important to point out that your credit history will play a big role here. With a good credit score, your down payment can be as little as 3%.
While getting rejected for a loan might be unsettling, it doesn’t mean you’ll never be qualified for one in the future. You’ll just need to be able to prove that you’re more financially stable the next time around. You can do this by improving your credit score, getting rid of debt, paying bills on time and of course, earning a higher income.
As a word of warning, if you get rejected for one home loan, don’t apply with a bunch of other banks or mortgage companies with the hopes of getting approved. This can hurt your credit score (since each application involves a hard credit check), which will make acquiring a mortgage even more difficult for you. It’s better to simply work on improving your financial stability and then applying again several months later.
To learn more about applying for home loans, contact The Federal Savings Bank today!