Making yourself attractive to lenders
When you apply for a home loan, lenders will base their approval on two important factors:
- your ability to make a satisfactory down payment, and
- your credit profile, which indicates your likelihood to make the ongoing monthly payments on time.
Before you start the application process, it’s important to get your finances in order so you can get the best deal possible on your home loan.
Down Payment Requirements
Depending on your lender and the type of loan you choose, your required down payment can range from 3% to 20% of the purchase price of the home (see our Mortgage Options page for loan programs with lower down payment requirements). For example, the down payment on a $200,000 home would range between $6,000 and $40,000. With a significant lump sum due at the time of closing, you will need to build your savings before you buy a home.
Saving for a Down Payment
Establishing a monthly budget will help you put away enough money for your down payment. Maintaining that monthly budget will also prepare you to begin making your monthly mortgage payment once you buy your home. Once you’ve assessed what your budget will support, consider having money automatically deposited from your paycheck or bank account to a high-yield savings account to make it easier and more convenient to put aside money each month. Discover Bank’s AutoSavers Plan can help you start saving today.
You can also use money from other sources to help you make the down payment:
- Some 401(k) programs allow you to borrow money for a new home purchase.
- IRA accounts have provisions that allow withdrawals for a first-time home purchase.
- A second loan can be taken out to provide the funds for a down payment.
- A monetary gift from a relative or friend can be used as source of down payment 1.
The Importance of Your Credit Score
A credit score is a way of measuring how likely you are to pay your bills. It’s one of the key factors that lenders look at when deciding if they will lend you money to buy a home and at what interest rate. The higher your credit score, the better interest rate you can get.
Your credit score is based on a credit report that contains information on your credit history, such as the amount and type of debt you have and whether you’ve made any late payments. Credit scores range between 300 and 850. Call your mortgage banker to discuss your options.
Obtaining a Copy of Your Credit Report
You should obtain a copy of your credit report before starting the home buying process. You will see what your credit profile looks like to potential lenders and can then take steps to improve your credit score if necessary.
You can receive one free copy of your credit report each year from each of the three major credit reporting agencies – Equifax, Experian, and TransUnion – by visiting www.annualcreditreport.com. If you pay a small fee to the reporting agency, the credit report you receive will also include your credit score.
Improving Your Credit Score
Improving your credit score will help you obtain a better interest rate, and therefore, lower your monthly mortgage payment. To improve your credit score, Experian recommends taking the following actions:
- Correct any errors on your credit report by contacting the reporting agency
- Reduce or pay off any debts you have
- Establish a history of making all your payments on time
- Continue to use at least one credit card and pay it in full each month
- Avoid changing jobs or taking out any new loans
- Ask lenders to reduce any large credit lines you have to trim your potential debt
It can take anywhere from a few months to several years to improve your credit score. But once you establish good credit habits, the negative information will eventually be deleted from your credit report and replaced with positive information that will make you look more attractive to lenders.
1 Terms and conditions apply to gift funds depending on your loan program. Consult your mortgage banker for further details.