Do you know how to qualify for a home loan? What do lenders look for? It’s not a complicated process, but you should learn what’s involved before you start shopping for a new home.

Step 1: Learn how much you can afford.

How much can you afford to pay for your new home? Use a mortgage calculator to estimate the amount of your loan payment. Just enter the purchase amount, down payment, loan term, interest rate, and zip code where you’re planning to buy your home. 

Remember that the purchase price is just part of the total cost of ownership. Start your home buying journey by creating a monthly budget that includes these ongoing expenses:

• Mortgage, including loan interest
• Property taxes
• Homeowners insurance
• HOA fee
• Utilities
• Internet and streaming services
• Maintenance (such as lawn care, trash removal, repairs)

These are your monthly costs for owning a home. You’ll also need to determine the closing costs, which are the fees required to be paid when you close on the purchase. In addition to your down payment, you’ll pay for a variety of fees associated with the purchase, like appraisal, attorney, title search, and loan origination, to name just a few. Your lender can provide an estimate, but the rule of thumb is that closing costs represent 2% to 5% of the purchase price.

Step 2: Check your credit report.

Your credit report is the most important factor in determining if you qualify for a mortgage. This critical report provides comprehensive details into your credit history—such as how much debt you have, whether you make timely payments, amount of available credit, any defaults on loans, and applications for new credit.

Your credit report does not show your income, savings, and investments. The lender will ask about those assets. You may be required to show proof, with account statements and paycheck stubs or transfers.

What does your credit report mean when you’re planning to buy a home? A prospective lender is looking at your creditworthiness. Are you a safe risk? Someone who is considering loaning you money to make a big purchase certainly wants to know you’re able and likely to repay the loan. 

Your credit history is used to assign you a credit score. Here are the scores and what they reflect:

300 to 579 Poor

580 to 669 Fair

670 to 739 Good

740 to 799 Very Good

800 to 850 Excellent

Clearly, the higher the credit score, the better position you’re in to get a mortgage. There are loan programs for people who fall within the “Fair” range, so don’t be discouraged. 

The other reason to check your credit report before moving forward is to make sure there are no errors that could negatively impact your credit score. You might have been penalized for charges you didn’t make or someone else’s history is showing up on your report. It happens! Take the time to know what lenders are going to see in your credit report.

Before you rush out and request a credit report, be advised that pulling your report repeatedly could cost you in points. This is known as an “inquiry”.

Some inquiries will negatively impact your score. Requests for new credit or loans is an example of a hard inquiry, with each inquiry potentially costing points in your total credit score. Hard inquiries stay on your credit report for at least a year. You are entitled to get a copy of your credit report for free, once a year, by going to AnnualCreditReport.com.

Step 3: Apply for pre-approval

Mortgage pre-approval is a critical action for homebuyers. With a few simple steps, you’ll learn whether you’re likely to qualify for a mortgage and the amount you could borrow. This knowledge—backed up by a pre-approval letter from the lender—lets you shop confidently. 

To be pre-approved for a mortgage, you’ll need to provide a lender with the following information and documentation:

• Photo identification: driver’s license, passport, or state-issued identification
• Social security number (for credit check)
• Employment information: current job, employer, and how long you’ve worked there
• Copies of recent pay stubs (preferably within the past 30 days) or electronic copies of automatic deposits of your paycheck
• Income tax returns for the past two years
• W-2 forms from the past two years
• Bank account information (bank name, routing number, account numbers)
• Investment account statements
• List of monthly debts, including rent or mortgage, credit cards, loans (e.g., car, student)

Within a day or two, you should hear from the lender. If you are not pre-approved for a mortgage, ask what’s blocking your way. There might be some quick fixes you can do. In addition, you can contact other lenders, since they don’t all follow the same decision-making criteria.

Step 4: Explore your mortgage options.

You have a wide variety of loan programs to consider when you’re planning to buy a home. 

A conventional loan is the most common type of mortgage program. The loan is backed by a private lender, like a bank or credit union. Buyers with good credit often opt for a conventional loan, which offers competitive rates. Contrary to popular belief, you may qualify for a mortgage with less than a 20% down payment. There are some drawbacks, like the requirement to purchase private mortgage insurance, but it might be worth the added cost to buy your home now, with a lower down payment.

A government-backed home loan is a program that is ensured by a government agency. These loans are a good match for people with less-than-stellar credit and a small down payment. Examples include the Federal Housing Administration (FHA), Veterans Affairs (VA), and United States Department of Agriculture (USDA). These programs offer low to no down payment options, low closing costs, and competitive interest rates for buyers who qualify for a home loan for one of these programs.

A fixed rate mortgage maintains the same interest throughout the term of the loan, often 15 or 30 years. Your interest rate is not impacted by changes in the economy. However, if the rate drops, you have the option to refinance your home at the lower interest rate.

An adjustable rate mortgage (ARM) features a rate that will change over the loan term. Initially, the interest rate is fixed for a certain amount of time, which varies according to the loan program. It can be fixed for one year or more. After that time, the rate adjusts to market conditions, with a cap on how high the rate can go and how often it can increase. Because of the higher risk with an ARM, the initial rate is often lower than with a fixed rate mortgage. It’s a good option for homebuyers who plan to own the home for a short period of time, before the initial period expires and the rate goes up.

Step 5: Make adjustments in your finances.

Once you’ve completed the first 5 steps for how to qualify for a home loan, look for ways you can improve your financial situation to prepare for buying a home. With some small changes, you might be able to afford a more expensive home—in the location you really want, with the features on your wish list. Look at cutting back on expenses like buying take-out food and having it delivered, entertainment, and shopping habits. Also, talk to your lender about the benefit of paying down some of your debt. 

Buying a home is a big investment. You need to prepare for assuming the responsibility. Follow the steps outlined here so you can be in the position to buy the home you want and can afford.

New homes for sale near Raleigh

Are you now ready to shop for a home? New Home Inc. is building communities of new homes for sale near Raleigh, in desirable suburbs, like Fuquay-Varina, Lillington, Smithfield, Wendell, Willow Spring, and Zebulon, NC. Each city and town has its own unique character, while sharing easy access to Raleigh. Lillington, NC, is just as close to Fayetteville, NC—home of Fort Liberty—as to the heart of Raleigh. 

You can choose one of our quick move-in homes—townhomes and single-family homes that are brand new and either completed or almost done. Or pick a community, a lot, and a floor plan, and let New Home Inc. build your dream home just the way you’ve envisioned it. Some of our communities offer large homesites, up to 2 acres!

The team at New Home Inc. makes buying a new construction home satisfying, easy, and affordable. Ask us about current incentives that increase the value of your home without raising the price. And we might even be able to lower your interest rate!

Look at what you get when you choose New Home Inc. as your builder. We’ve developed a Future-Proof approach to designing homes and building communities with features that make a difference in the way your home “performs” for you.

• Smart home technology: Move in and easily connect your smart home devices because we’ve wired it that way. Your home also includes the standard feature of a smart home security system (video doorbell, smart lock), smart home network panel, and smart thermostat.
• Protected home deliveries: Our homebuyers love the smart door delivery center! This fully enclosed space is between your exterior and interior front doors. It’s secured by a smart lock to protect your packages from the elements and curious passersby. 
• Electric vehicle charging station rough-in: We’ve also designed our homes to keep up with the growing demand for electric vehicles. Whether you currently own or plan to buy one, we’ve done the work to set up a charging station behind the wall so that completing the installation is simple when you need to add it.
• Energy efficiency: New Home Inc. builds our homes according to the stringent requirements of ecoSelect Home Efficiency Program. ecoSelect certifies your home is designed and built to high standards in materials and processes, conserving energy and lowering utility bills.
• Improved indoor air quality: Your home includes a whole home air filtration system, because clean air should never be an option. 
• More kitchen seating: The kitchen island has expanded in use, so we expanded the space. We designed our islands to be oversized, with seating on 3 sides to accommodate more people.
• Extra storage space: Homebuyers love the “messy kitchen” service pantry—a nook in addition to the pantry—that adds a serving, storage, and clean-up space beyond your kitchen, reducing the clutter and traffic.
• Stronger connectivity: Count on the strength of CAT6 cabling that’s used in all of our homes. Our higher standard delivers stronger, more reliable connections throughout your home, without dead zones.

When you’ve completed the process of learning how to qualify for a home loan, contact New Home Inc. so you can see how much your investment can return.