A home loan is one of the most important investments you can make; buying a home means owning property, and being an owner means the potential to watch your investment grow in value over time.
Unlike buying a new vehicle, which begins depreciating as soon as you drive it off the lot, buying a home means anticipating more value from your investment and not less.
That is one reason why the process of applying for a home loan and getting approved can be so difficult when looking from the outside of the process.
The lender has to make sure the borrower is a good credit risk and there are financial benchmarks for doing just that.
Credit approval for any large loan depends a combination of factors. One factor is your employment history; those who haven’t been working very long (less than 24 months in many cases) have a much harder time getting loan approval than those who have a longer work history.
The nature of your income is another factor–if you earn commission, for example, you will be required to have earned those commissions for a minimum time period.
The same is true for contractors who have recently switched to contract-type work and self employed borrowers who also have recently made the jump.
And then there’s your credit report. Credit scores are NOT the sole determination of a borrower’s credit worthiness, as we’ve explored above. But your FICO scores ARE a very important part of that process, and if your credit scores are low your lender will have a hard time justifying the loan.
Working on your credit in advance of your home loan is the best way to get closer to home loan approval.
Credit reporting agencies such as Experian advise consumers that there are four factors that affect your credit scores. Experian ranks these factors from most to least influential (on your credit scores) on its official site as follows:
- Most influential: Payment history (paying bills on time)
- Highly influential: Age and type of credit (establishing a good mix of loan accounts); percent of credit limit used (avoiding “maxing out” cards)
- Moderately influential: Total balances and debt (limiting debt to what’s prudent)
- Less influential: Recent credit behavior and inquiries (applying for new credit); available credit (avoiding opening unneeded credit accounts)
Borrowers who pay attention to these areas at least 12 months before applying for a home loan get much closer to having that loan approved. Working on these issues improves your credit scores over time, and it’s best to expect the process to take more time than you realize to start working. The time invested is well worth the result.