Since 2008’s Great Recession, American loan companies have reeled in their financing options. You can still get a home mortgage, but you have to understand the lender’s priorities first. These five tips can help you qualify for a mortgage loan.
1. Clean up your credit history.
Lenders review your credit report to determine how well you have been able to manage your money, how much debt you are carrying and whether you will be able to pay back any funds you are offered. To clean up your credit history, request reports from Experian, Equifax and TransUnion and dispute any incorrect details. Then, reduce the amount of credit being used but do not cancel old accounts. If you have serious credit problems, you may need to work on them for six months or longer before pursuing a mortgage. You want to boost your credit score as much as possible. In general, people with scores above 750 receive the best interest rates and terms while people with scores below 599 must seek expensive subprime mortgages.
2. Solidify your employment.
Job stability lets the loan company know you will continue to bring in enough income to pay the mortgage. Most lenders ask for two years of employment history. They like to see that you have spent a long time in the same position or field. They also want to see that your income is stable from month to month. If you rely on overtime, commissions and bonuses, you may need to explain these details to a loan officer.
3. Check your ratios.
Mortgage lenders want to know that you can handle a new home purchase with your current income and expenses. They look into this situation by figuring out your two debt ratios.
- Your housing ratio, or front-end ratio, shows how big of a bite home ownership will take out of your paycheck. Add all of your monthly housing expenses, including condo fees and HOA fees, and divide that number by your gross monthly income. Your ratio should sit at 0.28 or lower.
- The debt-to-income, or back-end, ratio shows how much your overall debt payments will be in relationship to your income. Add your housing expense to the minimum required payments for credit cards, student loans, personal loans, child support and other revolving debt. Divide that total by your gross monthly income. Your ratio should fall at 0.36 or lower.
You can still qualify for a mortgage with high debt ratios, but your options will be limited.
4. Increase your down payment.
Banks traditionally like to see down payments of 10 to 20 percent on owner-occupied property loans. The higher sum means that you have more cash invested in the transaction and you are less likely to walk away from the property. With a larger down payment, the lender may be willing to consider someone with a lower credit score or higher debt-to-income ratio. A down payment as low as 3.5 percent can still get you into a home through the FHA loan program.
5. Have a backup plan.
If you do not immediately qualify for the mortgage of your dreams, you may need to think of another plan. For instance, you can improve your credit rating or find a less expensive home. You can also ask for the help of a co-signer who has more income and better credit. Qualifying for a mortgage loan takes planning and perseverance, but it is a small price to pay for a slice of the American dream.