About a month and a half go my wife and I got pre-approved for a home loan. Many young adults are curious about what loan officers look at when considering you for a home loan, and some of them don’t find out until they are sitting in a loan officer’s office.
Thankfully for us the meeting with the loan officer went well and we got pre-approved slightly above what we were hoping for.
On Friday I talked about the importance of having a credit card and building credit if you are planning on buying a home. Today I will discuss the major things that loan officers look at when considering you for a home loan.
Credit
Having a solid credit history is very important for lenders. It shows that you are diligent when it comes to paying back loans and your credit cards.
I was talking to someone I know who invests in real estate and he said the rental market is hot right now because there are many people who have the income to buy a home but because they walked away from their home after the market crash they simply do not have the credit at this time to get a loan approved.
Time is your friend when it comes to improving your credit score. The longer you have had a line of credit the better; the longer you have kept your credit cards at a lower balance the better. Even when something catastrophic happens (think bankruptcy) you can still slowly build your credit back to good standing.
Unfortunately, most young adults figure out the ins and outs of credit right before they want to buy a home, when in reality it would have been better if they looked into what contributes to a higher credit score a few years before they planned on getting a home loan.
Income
Creditors like to see people who have worked at a full-time job for a long period of time, but as a young adult this is likely not the situation you are in. Six months or more should be fine, but it depends on the job. If you do freelance/consulting, you will need longer (1-2 years minimum) of consistent work.
If you are only doing something that is seasonal (i.e. 6-9 months of the year) you may have a harder time getting approved. I have heard that if you show that you do this seasonal work consistently for a few years they will consider it.
Assets
The amount of money you have in your checking/savings accounts, 401k, HSA, etc. will factor in to your approval. Even if the seller pays closing costs you will have to come to the table with a material amount of money. Having enough money in the bank to cover these expenses, in addition to your regular expenses, is important.
Debt
Debt is an important aspect to getting approved for a home loan. One important thing loan officers look at is your debt-to-income ratio. It needs to be above a certain percentage (something like 43%) for the loan to be approved. This is a big issue for young adults because most have a lot of student loans and not very much income when they graduate.
For multiple reasons it makes sense to get rid of that credit card debt before trying to get approved for a home loan, but keep in mind that your student loans may push you over the debt-to-income ratio, in which case the officer can’t do much to get you approved. Other outstanding loans like title loans will also push your debt-to-income ratio in the wrong direction.
Please Note: I am not a loan officer and these are simply my takeaways from going through the pre-approval process.
My wife and I both have a lot of student debt, but our income and credit were able to get us pre-approved. If you plan on buying a house consider where you stand on each of these areas and where you would like to be by the time you go in for pre-approval.
You can always try to get pre-approved and see what the loan officer says about your situation. Worst case scenario they say “not now.”
Have you gone through the process of getting a home loan? Do you have any insights to share?
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I have absolutely heard that you should have six months on your current job before applying for a home loan.. I have to wonder how that reality affects the folks that I know who have quite their day job to make a full time living online..
-jefferson
@seedebtrun Again, I’m no loan officer, but I imagine they would need to show 2+ years if consistent income to get a loan.
I got a home loan about a year ago and had no problems whatsoever. I also had no debt other than my car loan since I applied for it in my own name. I had been at my job for about 11 months and that seemed like enough for me.
@Money Life and More Yeah no debt plus almost a year at your job sounds like a recipe for pre-approval to me.
We went through the process almost four years ago now and it was crazy how much we got pre-approved for. Of course we didn’t spend close to that number because the payments would have been ridiculous. We now make almost 60% more than when we were pre-approved and I’m sure the number would be substantially more if we had to do the process again. The biggest holdup was our length of employment for my job. At the time I had only worked for my employer for 6 months. Everything you mentioned was similar to our experiences on the pre-approval process.
@DebtnTaxes Yeah I have heard some people getting pre-approved for a lot more than they thought they would. If you don’t have a lot of debt and have a decent job, that pre-approval number seems to rise pretty quick.
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