Contrary to what you what might have heard on the nightly news, getting approved for a home loan is actually still possible. Banks are not lending to borrowers without jobs like they were three years ago, but if you have consistent income, and a decent FICO score, you will get approved for a mortgage.
To ensure that you get the best rate though, you need to prepare your personal balance sheet in advance of the loan process. The first thing you should do is run your credit, and take care of any errors and outstanding collections. Remedying these can take up to a few months, so do not procrastinate.
Next, pay down your credit card balances as much as possible. Credit score agencies use a ratio of outstanding debt over total available credit; you want to keep these ratios on your credit cards as low as possible, shoot for 25-30 percent. Doing these few things will send your credit score skyward, improve the interest rate you will qualify for, and lower the amount of money you will need to bring to the closing table.
Another thing to consider, make sure your down payment capital and or cash reserves, are seasoned for a few months in a bank account. Lenders are going to request at least two months of bank statements during the loan process, and what they are looking for is a consistent account balance. So if the source of your down payment is a family gift, or is simply hidden underneath your mattress, make sure you deposit the funds in to a bank account months in advance.
The most common reason for a qualified buyer to be rejected for a home loan is their debt to income ratio. Banks use this ratio to determine if you can afford the new loan payment, when added to your existing debt payments. To figure your DTI ratio, take the monthly payments you have on your debt (including the proposed mortgage payment) and divide it by your current gross income (debt/income). The highest debt to income ratio lenders will usually allow is around fifty percent, so eliminating a portion of your monthly reoccurring debt before the loan process will drastically improve the likelihood of a loan approval, and a better rate.
Getting an early start is the key to qualifying for the best financing, the rate you will ultimately end up with is determined by the financial snapshot you provide lender. So clean up your respective balance sheet before you invite the bank over for cocktails.
Keep in mind, the interest rate on your home loan will normally carry more weight financially over time, than the variance in purchase price of homes you search for. Here is a good tip, put equal focus in to your financial house cleaning, as you do your home search.
Robert Waldeck is a Tax Accountant, and owner of Waldeck Tax. He uses his blog to answer personal finance and waldecktax.com/taxblog tax questions. Also, visit his website to find an waldecktax.com affordable tax service, and useful financial advice.
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