It’s not as easy as it once was to get a home loan. Government regulations due to the recent housing crisis are the primary culprit. The requirements are more stringent than they were 10 years ago. Debt-to-income ratio requirements are much tougher than in the past.
It’s more challenging to get a mortgage, but not impossible.
Make your mortgage application more likely to be accepted:
- Have a down payment. The less money you need to borrow, the better your odds of being approved. The larger your down payment, as a percentage of the sales price, the more comfortable the bank will feel. Banks would much rather loan 70% of the value of the home than 95%.
- If your income or credit are less than impressive, a larger down payment can make a huge difference.
- Pay down your debt. Your debt utilization ratio should be below 30% to maximize your odds of receiving approval. That means if your credit card has a credit limit of $10,000, your balance should never be above $3,000 at any point during the month.
- Raising your credit limit is another possibility, provided you won’t be tempted to borrow even more.
- Stay at your job. Frequent hopping between employers will make your lender nervous. Show that your income, and you, are stable by staying with your employers for at least two years. Avoid changing employers during the application process. After you’ve closed on your new home, change jobs as often as you’d like.
- Minimize the amount you pay toward debt each month. If you’re making payments on two cars, a student loan, alimony, a home-equity loan, and three credit cards, there might not be much left over for a mortgage payment.
- Have reasonable expectations. Applying for an $800,000 mortgage with a household income of $50,000 is likely to end in failure. Aim for a mortgage payment of 25-30% of your monthly income. Anything higher is likely to result in rejection.
- Increasing your income to ensure that you can make the mortgage payment is also beneficial.
- Know and fix your credit score. Before beginning the search for a new home, get copies of your credit reports and your credit scores. In most cases, you will struggle to get a mortgage if your credit score is less than 680. There are many online resources dedicated to raising credit scores. But be wary of companies selling credit repair services.
- Negotiate for a lower price. This is similar in effect to raising your income or finding a lower-priced home. Anything that reduces the loan amount or increases your income is helpful.
- Give yourself plenty of time. The above advice can’t be implemented on short notice. A year or more of planning is ideal. There’s little that can be done to enhance your odds in the next month or two. Sit down with a loan officer and review your situation with him. Make a plan together.
- Making a financial commitment that could last 20 years or more is serious business. Do the necessary pre-planning to make it happen.
Focus on being as attractive to your lender as possible. This means minimizing your debt, having a significant down payment, and setting your sights conservatively. Lenders are interested in reducing their risk. Do all that you can to minimize the risk to your lender, and your odds of receiving approval are greatly enhanced.