5 Steps To Improve Credit Score Before A Home Loan

how to improve credit score before a loan

Importance Of A Credit Rating For A Home Loan

Your credit score, in other words, all the stuff that is on your credit report has a direct impact on your home loan application. It is the first document and factor that a mortgage lender looks at to assess your eligibility.

Different lenders have different underwriting guidelines. Most of the lenders look at several of the pieces of financial information of the potential borrower, such as employment history, income and job stability. 

It is possible that a lender may qualify you for a loan even though your credit score is on the low side.However, having a good credit score ensures you get approved with the best terms and conditions.

How To Improving Your Credit Score

So, what do you know about your credit score? Have you pulled your credit report and score did before the lender does? If you haven’t you should.

Checking and correcting your credit report is a way to improve your credit score. You should not leave this still too late. Do it at least six months prior to applying for the home loan. This gives you ample time to set records straight and for the results to show in the form of an improved credit rating.

If your credit score is good, that is, in the upper ends of 700, then you don’t have to bother. But if it is not, depending on how low it is, you are going to suffer for it by getting a higher interest rate, finding it difficult to find a lender who approves your application or even facing an outright denial for a loan.

Find Out Your Credit Score

So first thing, check your credit score. There are many sources for doing this but the best way is to go to myfico.com and buy it from there.

Fico credit score is the most common score used by most of the lenders.

Get Your Credit Reports

Next, pull your credit report from the three credit bureaus, TransUnion.com, Experian.com and  Equifax.com. You may be able to get all three credit reports from the website of a single credit bureau.

You are eligible for a free credit report from all the three main credit bureaus every 12 months. So if you haven’t already, go to www.annualcreditreport.com and get yours for free.

Examine your credit score

One of the good features of ordering your credit score is that it comes with a complete summary of the factors that are affecting it negatively. So if it’s late payments, unpaid debts, lack of depth you will know what it is.

A credit score is calculated according to a certain formula. While the exact formula is not known, it has been revealed that the following factors are used with a varying degree of importance.

  • Payment history – 35%, 
  • Balance – 30%, 
  • Length of credit – 15%, 
  • Enquiries – 10%, 
  • Types of credit – 10%.

It should be mentioned that a credit score takes into consideration when the consumer is shopping for the best possible loan option. He may apply for credit with various mortgage lenders resulting in multiple inquiries coming on the credit report. The credit score understands this. Which is why multiple inquiries made for the same kind of credit within a period of 14 days are treated as one.

Now that you know what affects your credit score, it’s time to start working on your accounts.

There are two important ways to improve your credit rating:  Bring unpaid and delinquent accounts in order and, by attempting to dispute other negative items from your report in an effort to having them erased from record.

Dispute items on our credit report.

  1. There may be various negative entries which might be removed from your credit report by the procedure of disputing. 
  2. Incorrect information such as a debt that has been paid off but is still getting reported as unpaid can be disputed. 
  3. Other entries can be removed by putting the burden of proof on the creditor.
  4. When you order a credit report you are also allowed to file a dispute either online or through postal mail. Filing a dispute online is as simple as logging in with the credentials provided to you.

For every dispute filed, the creditor is supposed to get back to the credit bureau within 30 days. If he doesn’t the entry has to be removed from the report. You can try this with the very old debts as the creditor is less likely to have  maintained the necessary paperwork to prove the debt. This is also the way to go for debts that you believe are not yours.

However, for the debts you own, the better approach is to settle them, if you can’t pay them back in full. 

The icing on the cake will be if somehow you can convince the creditor to report the debt as fully paid to the credit bureau. That will have a better impact on your credit rating than settled debts.

Basically, try to set as many factors right as possible.

It is generally believed and is commonly true that when people have a bad credit score, they are likely to be suffering from other money problems. 

For example if someone is late with credit card payments repeatedly, it cannot simply a case of forgetfulness each and every time. Similarly if one revolves a high amount of money on credit lines, it’s likely that the person is living beyond their means and is always a high-risk for default.

What we are trying to say is that improving your credit score is not about a quick fix. It is about fixing long-term issues and habits that are causing you to be in a bad credit situation.

You know the things that affect your credit score now. Therefore:

  • Get regular with payments.
  • Reduce the balance on your credit cards
  • Charge your credit cards, less than 50% of the credit limit.
  • Cancel additional credit cards you don’t use.
  • Don’t apply for too many lines of credit.
  • Maintain good transaction history for sometime if you have started using credit recently

With time, your credit rating will improve and you will be able to get better terms with your mortgage lender. Consider reading a good book, researching online and credit counselling if you feel your credit situation is out of control.

How To Fill Out the Uniform Residential Loan Application

Most of the mortgage lenders and brokers use the uniform residential loan application to collect the required data from potential home purchasers. Many lenders use the standardize document.

Some vendors may help you fill out this form while others may expect you to do it yourself. Whoever fills out the form for you you need to ensure that the information on the form is correct and accurate.

Ultimately it is you who is responsible for the truthfulness of the application since you are the one who is going to be signing on it.

Main sections of the uniform residential loan application

1) Type of mortgage and term of loan

The first section of this form contains information about the mortgage terms and conditions. The amount being borrowed, the interest rate, the term of the mortgage and the type of the mortgage (ARM/FRM) get a mention here.
If you are unsure of these points at the time of filling out the form you can leave them blank and the lender will fill them out for you. Your mortgage lender or broker will complete the agency case number.

2) Property information and purpose of loan

Mortgage lenders will want to know the nature of the property being purchased. They would also want to know why you are borrowing the money. In this section you provide the address and the description of the property, which simply means the block, and lot number of the property.

This information can be found on the preliminary title report, which you your real estate agent and your mortgage lender should have. This is given to you soon after you have signed a purchase agreement if you’re buying a property.

For refinance situation the lender already has access to this information.

The information that you include in the purpose of loan section indicates to the lender whether you are planning to use the mortgage to buy a home, refinance existing home or constructing a home. The lender will also want to know whether the property you are buying is your primary or a second residence or you are buying it for investment purpose.

The purpose you cite for taking the loan will effect the terms and conditions as well.

uniform home loan application

The mortgage lender usually considers loans given out for investment properties to be riskier than primary residences because they are presumed to be less important to a homeowner than his primary residence.

For this reason the interest-rate on second residences and investment properties is higher.

You may be tempted and might even be advised by your broker and other people to lie on this aspect of your application. However, you should be aware that you can easily get caught if you falsify information.

Even after closing on loan purchase the loan lenders can ask for proof such as a copy of the utility billing in your name to prove that you are living in the property. Lenders have even been known to send a representative to the house to see who is living in the property.

When you plan for the mortgage you must declare the way you hold the title to the property as a single owner, joint holder or joint tenant and so forth.

The lender will also want to know the source of the money from which you are making the down payment. Lenders are most comfortable if this payment comes from your personal financial resources. If the money has been borrowed, it is liable to increase  the burden of debt and interfere with your ability to pay the mortgage loan in the future.

In this section as well you are best off telling the truth because lenders always ask for bank account statements for the past few months as well as investment account statements.

Any money borrowed from relatives and friends will show up. If you are receiving money from a relative as a gift to be used for down payment, have them write a short note for the broker. The lenders provide a standardized gift letter format confirming that the money is a gift and does not have to be re-paid.

In spite of this letter the lenders are suspicious about such payments.

3) Borrower information

This section of the loan application will require you to provide personal details about yourself as well as any person cosigning with you on your loan application.

Years of education gets a mention. If you graduated from high school you have 12 years of schooling. 2 to 4 years of college education can be added to that. This information usually does not affect the lender’s decision to give or not give you the loan.

Lender also wants to know the address of the 2 prior residences you have recently stayed in. If you have been in your recent residence for the past two years you will not need to list your two prior residences. Lenders are looking for stability here.

Lenders will request a letter from a landlord to verify that you’ve paid your rent in a timely fashion. If you have moved recently lenders may also check the previous landlords. If you have made your payments in time you should be all right but if you haven’t you can explain yourself either by separate letter or in the blank space on page 3 or 4 of the application.

4) Employment information

Your employment history is an important factor in your mortgage application. Unless you’re independently wealthy, your employment history and your income will determine your ability to meet the payment obligation of the mortgage. Lenders are looking at candidates who can show stability with the job and future income.

If you have held your job for at least two years that his only position that you need to mention. If you work more than one job, you need to mention each one separately. If there have been more than one employers in the past two years you should list them as well.

Mortgage lenders are aware of the fact that in the current economic scenario many people change jobs. You might want to avoid showing many changes to make your application look good. If you have a job for a very short period of time you might want to avoid mentioning that on the mortgage application. You may also be tempted to cover a gap in employment because you want your application to look positive.

While it is not necessary to list every single employment position out in this section, you should be aware that your mortgage lenders will check the informations with your previous employers. It is usually better to disclose employment job changes in your application rather than have the mortgage lender discover it himself.

The lenders usually don’t mind some job-hopping. If they see frequent job changes, they might ask that you current lender fill out the ‘prospects for continued employment’ section of the ‘verification of employment request’.

This section also asks the applicant to list off their monthly income from prior jobs. You do not provide a monthly income from your current job here because it’s provided in the next section of the application.

You may also wonder why you are required to provide your current employers contact details. Shortly before your loan is ready to close the lender may call your current employer to verify that you’re still employed but the verification of employment is usually done through the current pay stubs and W-2s.

It is highly unlikely that the lender will call any of your previous employers unless he needs to verify some employment information on your application.

5) Monthly income and housing expense projections

Section 5 of this application determines the fate of most mortgage applications. Here you list your monthly income including your amount derived from investment such as bank, stock and mutual fund account as well as any bonus or commissions.

Most people’s employment income determines ability to borrow. If your income differs from month to month simply enter your average monthly income for the past 12 months. Some vendors use a 24 month average if you are self-employed.

6) Rental Income

Rental property is property that you bought for the purpose of renting it out. If you have other income sources such as child support or alimony should list them on the other line and describe them in this section. The more income you show the more likely you are to qualify for the mortgage.

7) Assets and liabilities

In this section you present your personal balance sheet which summarizes your assets and liabilities. The assets are subdivided into liquid assets and non-liquid such as real estate. Liabilities are any loans of debts that you have outstanding. The more of these obligations the more unwilling mortgage lenders may be to lend you a large sum of money.

It is a good idea to reduce your debt to income ratio before you apply for a mortgage. If you can pay off your high consumer debts such as credit card and automobile loans, you should consider doing that now. These debts usually carry high interest rate and can hurt your chances for qualifying for a mortgage.

8) Details of transactions

In this section you will detail the terms of the proposed home purchase or refinance. The purpose of the first part of this section is to calculate the cost of the home, including closing costs. After you subtract the expected loan amount, this column shows you the amount of money you need to come up with to close on the home purchase.

9) Declarations

This section contains some of the questions the lender needs to ask. If you say yes to any of these questions you can explain yourself on a separate page or in the blanks page on page 4 of the application. Just because you answer yes to any of the questions it does not mean your application will immediately get denied.

10) Acknowledgment and agreement

This is the section where you cross check and confirm that the information provided by you is true and accurate. If you haven’t been completely honest on your mortgage loan application this is your last chance to rethink and correct what you are doing.

If you have had someone else fill out the form for you, you need to make sure that the answers are correct before you sign the agreement. Now is the time to question yourself and ensure that you presented your information in the truthful light.

11) Information for government purposes

You may skip this section since it’s optional. It is used to track discrimination practices by the lender and to see if the lender does in fact discriminate on the basis of race, ethnicity and other non-financial factors.

12) Continuation Sheet (Page 3)

On the continuation sheet on page 3 of the uniform residential loan application you will find largely an empty blank page. This is for giving additional information that could not fit anywhere else in the mortgage application form.

This is where you explain the blemishes on your credit report, reasons for job changes etc. If you don’t have anything to put on this page for you should draw a line across it so that the lender knows you have nothing to say. Be sure to sign on the bottom of this page as well even if you do not write anything on it.

 

Why Mortgage Lenders Require Extensive Paperwork

The reasons that mortgage lenders need such extensive information about your finances to be satisfied about your ability to pay off the mortgage loan. You submit these documents to prove and substantiate your current financial status not only to the mortgage lender but also subsequently to other organizations that may buy your mortgage if the lender sells your mortgage in the second market, as many of them do. Pay stubs, tax returns and investment statements help document your income and assets. The lender assesses the risk of lending the money and how much they can lend you based on your financial stability.

The lenders cannot just take the word of the borrower because they have no way of knowing who is honest and who is not. The result is that lenders have to assume that all loan applications may lie given the opportunity.

You should not consider lying on your mortgage loan application. Although even some mortgage brokers in the quest to close more loans and more commissions may even advise buyers to do so, it is not a good idea. The number one reason why it is not a good idea is because you are very likely to get caught. One example of the way people cheat on their mortgage on application is by creating bogus tax returns with inflated incomes. The mortgage lender has several methods in which to trip you if you lie. If the mortgage is able to determine that you are lying on a mortgage application your application will get denied, anyway. in case you do not fit in the criteria of the lender to qualify for a mortgage on it, maybe it is for your own good. Mortgage lenders have a smart way of figuring out whether you can really afford to take on the home loan without the risk of foreclosure in the future or not. If the lender does not think you are an adequate risk, then perhaps you should wait for some more time and build up your financial resources before you take on the additional burden of mortgage.

Falsifying loan documents is committing perjury and fraud is not something you want to do. When you sign the IRS 4506 form, it allows the lender to request directly from the IRS copies of the actual tax returns that you filed. Falsifying your income on the application will be caught.

Even if you do lie on your application and get approved for more that you can really afford, you are liable to face foreclosure in the future and if not, the burden of debt can be severe if you have borrowed more than you can actually afford. If you’re short on a down payment alternatives are always available.

List of Documents and Paperwork Required by a Mortgage Lender

In order for a mortgage can do to make accurate assessment of your current fund situation he is going to need the details. The approval of mortgage loan hinges on this aspect. The mortgage lenders generally ask you to sign a form authorizing and permitting them to make inquiries from your employers as well as making a request for your credit report. Mortgage lenders provide you with an incredibly lengthy list of documents that require the mortgage applications. These usually include the following:

Pay stubs for the most recent 30 consecutive days

Two most recent w-2 forms

Two most recent years federal income tax returns

Signed IRS form 4506 — the request for transcript of tax return

Up-to-date profit and loss statement and current balance sheet if you’re self-employed

Copies of past two months bank and investment account statements

Recent statements of all outstanding mortgages

Copy of declarations pages for homeowner’s insurance policies in force

Home purchase contract

Rental agreement for all rental properties

Divorce decrees

The federal and state tax returns for the past two years

Partnership federal tax returns for the past two years

Condo or homeowner association documentation

Title report, appraisal and survey report

Property inspection report and pest control inspection report

Receipts for deposit

This is a comprehensive list of what a mortgage lender can possibly ask for you. However, in most likely cases not all of the items will apply to you.

Introducing other typical documents

There are some other common forms that you are likely to find with different lenders. All mortgage lenders and brokers have some individual requirements that they might be need you to fill.

You should get a legal notice of your right to receive a copy of the credit report if you have paid for it. You can always request the appraisal report from the mortgage lender. In case your verbal requests get ignored you may resort to a more formal written application request for your appraisal report within 90 days of the rendering of a decision to approve or reject your loan.

Home Appraisals are useful documents to have in your file and you never know when they may come in handy. You will also know what properties were used to compare with yours in order to discover how appropriate the cost your home was.

Equal Credit Opportunity act is a federal law that a mortgage lender may not reject a mortgage application because of non-financial personal characteristics such as race, gender, marital status, agents of both. You also do not need to disclose income that you receive as a result of being divorced. However, listing out as much income as possible on a home loan application can improve the chances getting qualified for the amount of money that you want to borrow. If you have any reason to believe that the lender is discriminating against you you can contact and file a complaint with the state Department of national institutions, Department of real estate or whatever state division monitors the functioning of mortgage lenders in your state.

Should You Go For a 30 Year Or 15 Year Mortgage Term

Once you have decided on the kind of mortgage you want such as fixed rate, adjustable rate or a hybrid loan, the next decision that you are likely to face these the duration of the loan. Should you choose a 30 year mortgage with a lower payment or a 15 year mortgage that will allow you to pay off your mortgage quicker.

The main advantage of a 30 year mortgage is that the monthly payments are going to be less. This may even allow you to qualify for a larger sum of money as your monthly payment means that you have your debt to income ratio.

However, you will have to take your monthly payments with a pinch of salt because over the entire term of the mortgage you will pay double the money as interest as compared to a 15 year mortgage. A 30 year mortgage will allow you to have more free cash on you if that is an important criteria.

So while you may pay more money as interest over the long run, you will be able to fulfills your other financial goals at the same time such as saving for retirement, vacation, children’s education sector. A mortgage loan payment should always be enough so that you don’t feel financially stable. A fixed-rate 30 year mortgage can typically have a payment that is 25% lower than a comparable 15 year mortgage.

Saving mortgage on a monthly basis will also allow you to make more productive use for it money on our 30 years. This productive use includes putting money away for retirement which will not only accrue interest on a compounded basis but is also tax deductible and tax deferred for future. You can make contributions that add to your employer-based 401K as well as self-employed SEP–IRA or Keogh’s. Everyone with employment income can contribute to an individual retirement account, IRA although these contributions may not immediately be tax-deductible if you or your spouse’s employer offers a retirement account or pension plan.

As long as there are no pre-payment penalty on a 30 year mortgage, you can make extra payments and finished paying off your mortgage much sooner. Just making one extra payment annually can reduce the term of the mortgage by as much as 7 years. Any more payments made towards the principal amount can allow you to pay off the mortgage in 15 years without having had to be constrained with higher monthly payment of a 15 year mortgage. However, this will require discipline and savings on your part.

A 15 year mortgage is a good idea if you have enough money to meet the monthly mortgage payment and you are reasonably sure that you will not be financially constrained in any way. If you can afford a 15 year mortgage and you can save a lot of money in interest. However, for most of the people 30 year mortgage tends to make more sense.

You should always endeavor to pay off your mortgage as quickly as possible. Even with the 30 year mortgage always ensure that there is no prepayment penalty. This way you can make extra payment towards the principal amount and pay off the mortgage loan quicker.

Affect Of Foreclosure on FICO Score

How A Foreclosure Can Affect Your FICO Credit Score

A foreclosure is when a short sale occurs on the home of a person where the amount you want a mortgage loan is recovered by the lender by selling the borrower’s property. A foreclosure can also result in a short sale where the lender agrees to accept less than the total amount you on the mortgage. A foreclosure has a strong potential to lower your credit score. A foreclosure is one of the more serious entries that can be found on your credit report.

The circumstances that led to the foreclosure does not really make a difference to the credit score.

When a credit score sees a delinquency on the credit report it measures the seriousness of the negative entry based on 3 following factors:

Recency, which means how recent is the delinquency. Severity, which means how late the payment is and how big is the amount. Frequency, which means how often does the consumer default on this particular credit account as well as other accounts in the credit report.

A foreclosure is a serious business because it includes all of these 3 factors. A mortgage lender does not like to do a foreclosure on our home because it is a no-win situation for everyone. In most of the situations it calls for financial loss for the lender and it gets a lot of bad publicity as well. So usually when a foreclosure happens it is after all means of recovering the debt from the borrower has failed. This also means that the payment has been long delayed which means the recency factor is strong. Because it is a Motley John and the amount involved is likely to be big sum, the severity factor is also high. Since of foreclosure does not happen after one late payment, the foreclosure also means that you have not paid the monthly installment for the past 6 to 7 months. Each late payment is reported to the credit bureau and that means the frequency of the default is also pretty high.

How can you improve your FICO credit score after foreclosure

a foreclosure will stay on your credit report for the period of 7 years. During this time it will continue to impact your credit score. However as is the case with any other late account on your credit report, the impact becomes less with the passage of time. However, your future mortgage lenders will not like to see foreclosure on your credit report. It makes them nervous to know that you have defaulted on a mortgage loan in the past. Unless you can provide them with adequate proof of unavoidable circumstances that made you will undergo a foreclosure and also convince them that you are in a position to make payments on your future markets, getting qualified for loans will be very difficult. Even after 7 years when the foreclosure has fallen off your credit report many mortgage lenders require you to state in your application form if you have ever faced a foreclosure prior to this mortgage loan or not. Lying on a mortgage loan application is never a good idea. So even after 7 years the foreclosure may hurt your homegrown prospects.

The only way to improve your credit score after foreclosure is to try and remain current on all other credit accounts. Keep using credit cards and other lines of credit responsibly and keep making regular payments on it. You can even consider opening a new line of credit such as a new credit card and using it discreetly to add to your payment history.

When Mistakes On Credit Report Prevent Loan Qualification

What to do when you discover mistakes on your credit report are the reason why you cannot qualify for a mortgage

In the credit reporting system, you are considered to be guilty before you can be proved innocent by the credit bureaus. In a nutshell, this means that if you have an error showing on your credit report which is a negative entry, it will be presumed to belong to you till you can have it removed from your credit file.

Removal Wrong Information from Credit Report

You can remove wrong information on your credit report and correct error by either disputing them with the credit bureau or by speaking to the lender.

The most serious kind of mistakes and damaging errors that can find their way on your credit are either mistakes about having made a late payment when in fact you were never late. The other kind is when you have somebody else’s credit accounts reported on your credit, which is made worse by a situation when that somebody else’s credit account is a delinquent or late account.

Many people do not discover the mistakes on their credit report till their mortgage application gets rejected because of it. If this is what happens to you then it is still not too late to begin the process of correcting the damaging in accuracies on your credit for.

You can remove inaccurate and negative data from your credit reports that does not belong to you or has been reported in elders by either the creditor or the credit bureaus themselves by filing a dispute with the credit bureau. This dispute can be filed online, over the phone or by writing a letter to the credit bureau. There is a procedure to be followed in order to do this which can easily be determined by visiting the websites of any of the credit bureaus. The process of filing a dispute is made easier when you order your own copy of a personal credit report. The credit bureau is supposed to respond to your inquiry and request for information collection or removal within 30 days of receiving such a request. Let’s say that an account was reported as late when you were never late on the payment. You can either approach the creditor and asking to correct the errors in the next reports that he sends to the credit bureau or you can provide the credit bureaus with substantial documentation to show that the payment was made. If you get a brushoff from the front-line customer service of the credit bureau you can did want to speak to their manager. If that doesn’t work you can file a complaint with the local government regulatory agencies. Your idea is to get the blemish removed from my credit report and often this process will require patience and persistence.

It is possible that despite all efforts you are not able to get the entry corrected or removed from my credit report. This can happen when the creditor for some reason refuses to be accommodating and does not make the effort of correcting the entry on your credit file and/or the credit agencies deemed the report to be accurate because you are unable to provide them with enough documentation to prove that the account was and is current. If this happens and you are not satisfied with the result of the dispute that you filed with the credit bureau you are allowed to put a statement of contention in your credit file which will allow future creditors to see your stead of the story and know that the negative entry on your credit report has been disputed by you.

It is a good idea to apply for your credit report before you put in an application for a mortgage loan. You can even ask the lender to give you a copy of your credit for because you are most likely to be paying for it in the origination fee.

Get a Free Credit Report

However, you do not have to depend on anybody to give you a free copy of your credit report because the federal law gives you the right to obtain a free copy of your credit report directly from each of the credit bureaus once a year, you can get your free credit report from Equifax [800–685–1111, www.Equifax.com], Experian [888–397–3742, www.Experian.com] and Trans Union [800–916–8800, www.TransUnion.com], by visiting www.annualcreditreport.com

AnnualCreditReport.com is a website managed jointly by the 3 national credit bureaus and regulated by the federal law of fair credit reporting act which allows you to access the free copy of your credit free every year. You can order your 3 credit reports all at once or you can stagnate the process, ordering one every 4 months which allows you to keep fairly constant monitoring over your credit file.

The fair credit reporting act also gives you the right to receive a free copy of your credit report if you are turned down for a loan because of some information in your credit file as long as you make the request from the credit bureau within 60 days of the denial.

5 Common Problems With Home Loan Approval And How To Solve Them

Dealing with Common Problems In Mortgage Approval

The ideal borrower has a good credit rating, can make a substantial downpayment, can prove good income, has few debts and liabilities and shows stability. Problems and  obstacles come about when any of these conditions cannot be met by the borrower.

However, these are common issues faced often by both the mortgage lenders and the borrowers, and there are solutions.

1) Credit Blemishes

    1. If you have had problems with creditors in the past and resulting nonpayments, late payments or delinquent accounts then you really cannot escape the consequences for very long. Mortgage lenders pull your credit report to evaluate your credit worthiness. They will see these negative remarks and will be reluctant to approve you for the loan.
       
    2. If this could happen to you take action as soon as possible. There are ways to improve your credit score. But these methods take some time. So act sooner than later.
       
    3. Do not try to hide facts from the lender because he will find out eventually. It is better to be up front with the mortgage lender and give an explanation for the credits lapses in the past if such reasons exist. Many lenders understand that situations beyond control such as loss of job or serious illness can result in problems with the credit history.
       
    4. Ask your lender upfront if the entries on your credit file are going to interfere with your mortgage application and which entries you need to be dealt with to have a better chance of loan approval. This direct feedback from the lender will tell you what issues you need to address.

    5. Seek alternate lenders. You will not have much luck finding lenders that dealing with subprime mortgage in today’s market conditions. Most of the lenders that dealt with subprime borrowers closed shop many years back when the meltdown in the real estate industry began.
      These contenders were known as B paper lenders and are more or less missing from the current market. The price that you have to pay to get approved for a mortgage loan in spite of having a less than shiny credit is that you pay a higher interest rate on your mortgage and maybe even higher origination and closing costs. Read more about bad credit / sub-prime mortgage.
       
    6. Use a mortgage broker. Mortgage brokers are usually in the know how of many lenders and depending upon your need and requirement can match you with the right lender, which in this situation would mean a lender with less stringent underwriting guidelines.
    7. Get a cosigner for your mortgage application who has a strong credit history and rating.

 

2) Fixer uppers and cooperative apartments.

Its just difficult to get a loan to buy a co-operative apartment. The reason lies in the complicity of the deed. Read in great detail about co-operative apartments and why they are different from standard mortgages.

Fixer uppers of properties that require major repairs or improvements before they can be considered safe for habitation. Major repairs could include an old foundation that needs repairs, old electrical wiring, plumbing replacement of the roof etc.

If the necessary corrective work exceeds 3% of the property value which is always the case with the major fixer-upper, getting a mortgage loan is a problem.

In all probability the lender will give you two separate loans. One for buying the property and another construction loan to make the necessary repairs and improvements.

3) Low appraisal

Another problem that can arise with your mortgage approval process is when the appraisal of the home comes in too low. You may have the income to afford the mortgage and your credit may be blemish free. But if the appraiser says that the loan amount you are borrowing is too much and that the property is really not worth that amount, your mortgage application may get rejected.

The reason is simple. For the lender, the home is the collateral. He is going to sell it to recover the money he lent you incase you ever default in the future. If the value is less than what you are borrowing, then he is already at a higher risk.

There are many reasons why a home may get appraised for a lower price than you thought.

    1. You overpaid. It can actually happen that overpaid because you liked the house. The amount that you are wiling to pay may have very little to do with the actual market value. You may be willing to go steep for your dream house but that doesn’t meant anybody else will.

      You have no option but to ask the seller to reduce the asking price. If the seller doesn’t agree move on without wasting your valuable time. You may also consider getting another real estate agent specially if you suspect that the present agent was deliberately trying to inflate the value of the property to increases his commission. A good agent’s negotiating skills and knowledge of the property rates can save you thousands of dollars whereas an incompetent and unethical agent can cost you that many extra.

    2. The home you are buying is located in a declining market. After the decline in the real estate housing sector, certain areas were more badly hit than others. Lenders put certain restrictions on mortgages in areas where the rates of the properties declined more dramatically. If your house belongs to such an area you might have to pay a higher rate of interest on a mortgage and be willing to make a larger down payment.

      A mortgage lender may make an exception to your dream home if your appraisal can demonstrate conclusively that the property values are not falling within the geographic area where your house is located.

    3. The appraiser does not know the property values in your area. It is quite possible that the appraiser that has been hired by the mortgage lender is un-aware of the market trend in your locality.

      This is especially true if the appraiser is from out of town. Many times the mortgage lenders hire professionals operating companies which may send their trained appraisers from their head office. For example, you decided upon the price that you wanted to pay based on the sale of comparable houses in the neighbourhood. But the appraiser valued the property lower because he was not aware of the neighborhood property rates.

      If this happens to you, request a copy of the appraisal from the mortgage lender. View what houses and sales he has taken in to consideration. If he has not made valid comparisons, you can point it out to the lender and show your concern. In such a case, some lenders might be willing to get a second appraisal at no extra cost although you should know that this is rare. It is difficult to get the lender to agree to a free second appraisal specially if the appraiser is someone the lender has been working with in the past and has confidence in his evaluation.

    4. The lender could be redlining. Redlining is the practice where the lender discriminates against a certain area or locality and does not give out loans for that area. This practice is illegal and so not very likely the reason for a low appraisal.

      However, if you do suspect that this could be the issue ask for a copy of the appraisal report. See if the appraisal is based on a realistic estimation of sales in your locality or not. If you find that the appraisal report does not reflect the current trend of property in your area you can ask the lender for an explanation. If you do not get a satisfactory response you can ask for a full refund of your loan application and appraisal fee and move your business to another mortgage lender. You can even consider filing a complaint with the appropriate agency in state that regulates mortgage lenders.

4) High Debt To Income Ratio

A lender can deny you a home loan if he feels that your debt to income ratio is already too high. Even though you feel that you are ready to take on the additional loan, when the lender tells you that you have way too much debt already, it might be time to take a closer look at your current liabilities.

Remember that the monthly payments on a home loan create a substantial financial burden. If you have not planned for it, it can interfere with your ability to maintain a certain lifestyle.

Here are some ways in which you can resolve the problem of having too much debt.

    1. Paydown the long-term loans. You can consider paying off some of your existing loans such as automobile loans and student loan. Paying off your existing loans will help in reducing your debt to income ratio. You should discuss this with your mortgage lender because typically the loans that have less than 10 months remaining on it are not considered as long-term notes.

      Fannie Mae and Freddie Mac prefer to have the payments on long-term debts not to exceed 40 to 45% of your gross monthly income.

    2. Cut down on your lifestyle expenses. If you are stretching your financial resources to the limit already with the current lifestyle that you have you have 2 options that you can implement. You can somehow increase your income or cut down on the frivolous and nonessential expenses.

    3. Take help from friends and family. If you have friends and family who are ready to boost your finances when you’re applying for markets such as giving you money for down payment or even having an equity share in the home, to not feel shy or too proud to ask for such help. Many times the close family and friends will be more than happy to help you out. It is also not too uncommon to have your parents or close family cosigned on your mortgage application.

      However there are ramifications for the cosigner. In case you are late on your payments in the future or for some reason cannot meet their mortgage obligations anymore the cosigner can be held responsible but the lender to make the payment. This could mean financial burden and even a financial emergency for the cosigners.

      You should discuss these aspects in detail with the person who you’re asking to cosign on your mortgage application and make sure that they are aware of every aspect and responsibility that they are undertaking.

5) Insufficient income

If you are having problems with getting qualified for mortgage because your income is deemed to be insufficient then there are a few steps that you can take to deal with this problem.

Your mortgage lender is trying to tell you that with your current amount of income you will most likely face severe financial stress if you take on this mortgage loan. Before you get upset with this think about the problem carefully. It may be possible that you have not calculated your financial obligations carefully.

If this is the case then it is time to go back to the calculations. Maybe you are not ready to borrow on a mortgage loan just yet and should wait for another couple of years until your business is doing better or you have got that promotion with the added salary raise.

  1. Larger downpayment. However, if you still feel confident that you can safely afford the mortgage with your existing income then you can increase the down payment if you are cash rich. Many lenders have less restrictive income requirements for applicants making more  than 25% downpayment.

  2. Get a company-borrower. Mortgage lenders usually like to have more than one borrower sign on a contract and take the joint incomes of both the people signing for the loan into consideration. So if you cannot qualify for the mortgage loan all by yourself you may be able to do so if you get the parents or spouse to cosign with you on your mortgage application.

10 Steps To Make Enough Mortgage Downpayment When Strapped For Cash

Gone are the days when mortgage lenders approved loans for the full buying price. Even subprime lenders dealing with borrowers with poor credit rating were willing to take these risks.

However, downpayment is almost always necessary now, although the amount may vary.

20% downpayment is considered to be the magic figure because it helps you avoid the additional cost of private mortgage insurance. You also do not have to pay property taxes in advance to the lender.

However even a 5% to 15% down payment helps in getting the home loan approved. The logic is simple. The more you invest in your mortgage the less likely you are to walk out on it in the future. 

10 Steps To Overcome Shortfall For Downpayment

There can be many reasons why you do not have the available cash to make a substantial down payment on your mortgage. But if you’re resourceful, this can only be a temporary inconvenience. The problem can often be solved with a bit of motivation and discipline.

Even people with high incomes can have a problem making a downpayment because they do not have enough savings.

1) Change your spending habits

If you haven’t managed to save enough money in spite of a regular and good income that perhaps you should cut down on your monthly expenses. The easiest to cut down are nonessential expenses like eating outside, renting movies and shopping for gratification.

Taking help from family it is common enough. Parents lend money to their children. According to the taxation laws anyone can make a gift to somebody for $12,000 each. Each member of your family can receive $12,000 in a given year.

This means that both your mother and father combined can give you $24,000. If you have a spouse than this amount doubles and becomes $48,000. If both your parents and your in-laws are giving you this money as a gift then the amount becomes $96,000. This money given as gift is tax free.

2) Ask your employer/company

If you are relocating to another area because of transfer from your company you can ask if your company will be willing to make an advance on your down payment. Many companies provide mortgage assistance and in some cases help to buy the house outright, but this is usually reserved for senior executives. Even if you are not transferring somewhere you should inquire in your company if they have any program that gives assistance to the employers for purchasing home.

3) Use tax refunds

When you get a tax refund, don’t squander it as a windfall gain. Treat it seriously and save it up towards that mortgage down payment.

4) Withdrawing from retirement plans

The government allows you to withdraw up to $10,000 from your IRAs, provided you use the money to buy your 1st principal residence. To avoid a 10% penalty tax for an early withdrawal you must be a first-time buyer who hasn’t owned a home in the past 2 years prior to this.

The funds must be used within 120 days of withdrawal in order to purchase or build your home. Many 401K plans also permit borrowing for a mortgage down payment. You can check with your benefits office for more details.

5) Get money from existing real estate

If you already own a real estate or vacation home which has appreciated in time you can use the built-up equity to get additional cash. You can either refinance or take a HELOC. You must however understand that whenever you take on an additional loan it reduces your borrowing power according. This is true whether the loan in question is an unsecured personal loan from a credit union, or a secured loan like a car or boat.

7) Equity sharing

This method allows 2 or more people to buy a house jointly. Only one or more people may use the house as a primary residence. For example a non-occupant investor can pay the down payment and closing costs in return for 25% interest in the property. You remain 75% owner of the home and are responsible for paying the mortgage on as well as property taxes and insurance on the house.

Any increase in value is shared according to the terms of the equity sharing agreement either after a specified period of time or when the property is sold.

While this arrangement can be worked out between any people it is common between family such as brothers or children and parents. An equity sharing arrangement can be a profitable agreement for all parties involved. While you are able to make a larger down payment and qualify for a lower interest rate on the mortgage your parents can get tax benefits and profit from the appreciation in the house value in the future.

The most important thing to remember is that when making an equity sharing agreement you must consult a lawyer and make a formal legal document stating all the terms and conditions in order to avoid complications well as potential deterioration in personal relationships in the future.

8) Use state or federal programs for first-time buyers

Freddie Mac and Fannie Mae and the FHA along with many other states have financial aid programs designed to assist low or moderate income buyers in purchasing their 1st home with limited cash down ability.

9) Take private mortgage insurance [PMI]

Having to take private mortgage insurance may increase your closing cost and the loan origination cost. It is also likely to increase your monthly mortgage payment. But at the same time it allows people who are strapped for cash during the time of the mortgage to get that mortgage.

Usually any down payments that is less than 20% off the the borrowed amount calls for the borrower to take on the private mortgage insurance. This insurance might have to be paid to the lender in advance for a period of 6 to 12 months. It is kept in an escrow account and is dispersed by the mortgage lender.

10) Sell your assets

You can generate extra cash down payment by selling some of your assets such as stock options, shares etc. You must understand the tax implications of doing this and to cover for the state and federal capital gain taxes.

Credit Report Problem Stops Mortgage Approval – What To Do

What to do when Credit blemishes stand in the way of getting approved for a mortgage loan.

Negative entries on your credit report can into the mortgage modification process. If you have had problems with creditors in the past and resulting nonpayments, late payments or delinquent accounts then you really cannot escape the consequences for very long. Even if you have not ended up settling or paying your creditors they will have reported these discrepancies to the credit bureaus and these records have found a way on your credit file. Which means that all future creditors who received an application from you and subsequently pull your credit report in order to evaluate your credit worthiness will see these negative remarks and will be all the more reluctant to approve you for the loan. If this is what is liable to happen with you when you apply for a home loan then you should take images and bold action today. 1st afford to not try to be quiet or hide these factors from the lender because he will find out eventually. It is better to be up front with the mortgage lender and give an explanation for the credits lapses in the past if clear and substantial reasons exist. Many lenders understand that situations which are beyond swamped control such as loss of job or serious illness can arise which can result in problems with the credit history and payment records. If such entries to exist on your credit file and you should ask your lender upfront if they’re going to interfere with your mortgage application and which entries you need to deal with in order to have a better chance of your mortgage application getting approved. This way you will get direct feedback from the lender himself and will know what issues you need to address on your credit file. There are some other ways in which we can deal mortgage approval problems if your credit report is a problem. There are a few ways in which you can combat a poor credit rating and get approved for a mortgage loan.

Seek alternate lenders

I’m not really sure how much luck you will have finding lenders that the with subprime mortgage in today’s market conditions. Most of the lenders that dealt with subprime borrowers closed shop many years back when the meltdown in the real estate industry have. These contenders were known as B paper lenders and are more or less missing from the current market. The price that you have to pay to get approved for a mortgage loan in spite of having a less than shiny credit is that you pay a higher interest rate on your mortgage and maybe even higher origination and closing costs.

Taking help from a mortgage broker

Mortgage brokers are usually in the know how of many lenders and depending upon your need and requirement can match you with the right lender. In this situation where you have the need to find a lender with less stringent underwriting guidelines, a good mortgage broker might know of a few.

Seek seller financing

When the interest rates for investments are high and as well as the rates on the mortgage loans, many sellers take to financing the home loan themselves. Sellers do this when they find that their finding problems in finding buyers for the home. This is somewhat a risky process for seller but some do it nevertheless. When the seller himself finances the loan terms and conditions can be more lax as compared to a mortgage loan from a formal lending institution. If you can demonstrate that you are in a financially strong position today to pay for the mortgage and the seller may be willing to ignore previous records because he is not bound by a set of policies and guidelines as many formal lending institutions are.

Get a cosigner for your mortgage application once again, the solution to having a poor credit rating may be to get a cosigner on your mortgage application, one who has a strong credit history and rating.

Save money and improve your credit

If you find that in spite of everything mortgage lenders are charging you astronomical rate of interest on your mortgage and/or are rejecting application down right then perhaps you should concentrate on improving your credit rating before you apply for a mortgage . Loan. In the meantime you can continue to rent and even save money for our larger down payment that will further help in bringing down the interest rate on your mortgage loan. Use credit responsibly and make regular payments so that in a couple of years time your credit rating is much better than what it was before.