Buying a house is both an exciting and stressful experience. If you’re ready for homeownership, one of the first steps is getting your home loan. Knowing how to get your first home loan is an essential part of this process. With a good understanding of credit requirements, loan programs and mortgage arrangements, you can get your first home loan quickly and start looking for your home.
How to Get Your First Home Loan in 5 Steps
1. Improve Your Credit
The first step in how to get your first home loan is knowing your credit score and, if it isn’t quite up to par, improving it. The better your credit score, the better your chances of getting a home loan, and you’ll receive better interest rates.
There are a number of different types of home loans, and the credit score requirements vary With an FHA loan, for example, you can start with a credit score as low as 500, but there are some stipulations. For a conventional loan, you’ll need a credit score of about 640, though 700 is better.
Improving your credit score can seem like a long journey, but it’s important to take this step by step. Once you get started, you may be surprised at how quickly your score can recover. The following can make dramatic improvements to your credit score.
- Consolidate debt: Work with a bank expert to consolidate your debts into one, low-interest account. You may not be able to consolidate all your debts this way, but do as many as you can.
- Pay off high-interest debt first: Credits cards are the most common source of high-interest debt. Pay off this debt first if you can’t consolidate it.
- Automatic payments: Set up automatic payments for things like utilities, phone bills, internet bills, rent, and other expenses. If you’re not sure you can cover all of these, consider working with a roommate, contacting your providers to see if you can negotiate lower rates, or cutting expenses where you can.
2. Shop Around
Once you have your credit score at a good place, it’s time to get your first home loans. Some home loans are backed by the government, while others are provided through private lenders, but all of these are available through banks. However, not all banks offer the same types of loans.
To get your first home loan and to get the best possible interest rates, it’s a good idea to shop around. It’s tempting to work with the bank or credit union that you’ve always worked with, but you might find better interest rates or lower down payment requirements with another institution.
As you ask about home loan terms at varying banks, be wary of terms that sound too good to be true. Though laws restricting predatory lending have helped to reduce this problem, some banks and lenders still make loans that take advantage of borrowers. Be wary of loans that do not require income verification or a down payment. Also, be wary of loans with balloon payments—payments that increase substantially after a set time—or loans that do not clearly state the payment terms.
3. Organize Your Documents
To get your first home loan, you’ll need a variety of documents. These documents will show that you have the income to pay for your loan, and prove to the bank that you are a reliable borrower.
Here are a few of the documents you’ll need to get a home loan.
- Proof of income: this might include W-2s or check stubs
- Debt documents: You’ll need documents showing how much debt you owe, and how much you’ve paid off.
- Current residence: If you are renting, bring your rental agreement. If you’re paying a different mortgage, bring these documents.
- Previous taxes: These documents will show the stability of your income and give lenders a clearer picture of your financial situation.
- Gift letter: If you’re using a money gift from family or friends to help with the down payment, you’ll need a gift letter.
This is one of the first steps to get your first home loans from the bank. Pre-qualification will show, approximately, the loan amount you can qualify for. This can help you narrow your price range and start to look for your first home.
Keep in mind that pre-qualification and pre-approval are not the same thing. Pre-qualification is generally based on information that you provide to your lender. This is an approximation of what the bank can offer you. However, the bank will not guarantee this amount until the pre-approval step, where they verify that the information you provided is correct.
Pre-approval is one of the final steps in getting your first home loan. With your pre-approval, you’ll receive a written document showing how much the bank will offer you, and your loan terms. A pre-approval application fee may be required. With pre-approval, the bank has performed a credit check and taken other steps to verify the documents that you provided.
Pre-approval from a bank will help your house hunting experience, especially in a competitive market. This will show that you can make a serious offer, which sillers are likely to consider first over offers that haven’t been verified by banks yet.
This is a general outline on how to get your first home. Remember to take these steps one by one, and be patient. Working through this process carefully will help to ensure you are confident in your decision.
Free Download: First-Time Home Buyers Guide
New to the home buying process? Simple advice to help you feel at home while buying one.
Download the Guide »