Is buying a home on your bucket list? If so, here are some important things to consider.
According to the Housing Policy Finance Center (HFPC), unless you have a high credit profile, the chance of being rejected is nearly 1 in 3.
The strongest candidates (those with the lowest chance of being denied) have a credit score above 700, a loan-to-value ratio less than 78%, and a debt-to-income ratio less than 30%.
This means that the strongest applicants made a down-payment of at least 22%, which is more than the recommended 20%. The mortgage payment also represented less than 30% of their income, which is the traditional standard for affordability.
Mistake #1. Applying for a home loan with unresolved credit issues.
To qualify for a home loan, you need to minimize your number of negative items on your credit report. You should work with a credit expert to help remove pesky items from your credit report (not you working on it, not your cousin…) I’m talking work with a company who is an expert in their field, and is staying on top of industry trends.
Mistake #2. Paying collections to increase credit scores.
Contrary to popular belief, paying off your collections will only HARM your credit score. When you pay a collection, it does NOT remove your blemished payment history. It just shows that you made an extremely late payment and re-ages the account which is NOT good.
Mistake #3. Carrying a high DTI (debt to income ratio) over 45%.
Debt to income ratio is one of many factors that mortgage lenders review to measure if you can manage your monthly payment.
To calculate your DTI, add up your monthly bills, then divide by your gross income (income before taxes). The result is your DTI. The lower the percent = the less risk you are to the bank. DTI Calculator
This will vary depending upon the type of loan, however as a rule of thumb, keep this between 31% and 43%. The lower the better.
Mistake #4. Attempting to get credit approved with a co-borrower.
All borrowers on the loan must have an acceptable credit score. Co-borrowers cannot be added to get past this requirement. If you have a co-borrower with no credit issues, you will NOT be able to get on the loan until your own credit issues are corrected.
Mistake #5. Ignoring credit issues until you find a home.
Many people miss their opportunity to buy their dream home because they took zero action on their credit, and got denied on a mortgage application.
If you have some credit issues, you should talk with a credit expert before applying. A good credit company can help you resolve most of the issues.
Repairing your credit takes time. Sometimes it can be only 30 days and sometimes is can be longer. It is a process and you must invest the time into yourself to benefit your future.
Approval Tip #1. Have your credit report improved, then apply.
You can get approved for a home loan! But you must have an acceptable credit report and decent credit scores to get approved.
Approval Tip #2. Have a large down payment.
Money solves a lot of problems. It is especially helpful if you have extra cash as a down payment on your dream home.
Approval Tip #3. Make sure you have several tradelines.
You will need at least 3 positive tradelines on your credit report. It can be a combination of your own as well as authorized user tradelines. Keep your balances at or under 30% and pay more than the minimum payment each month.
You can still get approved for a home loan even if you have credit issues. The idea is minimize and narrow down as many issues as you can to a very low number. You want to offset your risk to the bank as much as possible, so that they approve you and you can qualify for the best interest rate possible (meaning lower monthly payments).
Written by Val Singles