You’ve probably heard; it’s harder to get approval for a home loan than it used to be. And if you’re a first-timer, chances are you have the deck stacked against you–a short or spotty credit history, less time at your job, and a smaller bank account. But you have options if you didn’t get an approval right away.
Find out what you’re missing. Then get creative. For example, if your lender said you don’t make enough money, don’t think you’re going to have to go to medical school before you can afford a home. What the underwriter is really telling you is that your income isn’t high enough to support your new house payment and your debts. So one way to get approved for more house is to cut your debts. And many lenders stop counting a debt against you if it will be paid off in less than ten months. By paying the balances down until there are less than ten months’ payments left, you can free up a lot of income for housing expense.
Another way to offset inadequate income is to lower your mortgage payment by getting a loan with a lower rate. How do you accomplish that? By paying the lender for a lower rate, or rather, getting a motivated seller to pay it for you, you might be able to get your ratios down to an approvable level.
Finally, get some “compensating factors.” Many programs including FHA loans allow underwriters to stretch your ratios a bit if you can give them a compelling reason to do so. For example, if your current housing expense is more than your new mortgage payment would be, it’s obvious that you are capable of making it even if the ratios are a little high. Similarly, having at least three months’ expenses in the bank after you close your loan (called reserves) makes you a better investment because you could weather a financial hiccup with your savings. A seller can help you here too–by paying all your closing costs, leaving you with more money in the bank and a better-looking application. Another compensating factor is having a job with bright prospects for increased earnings, or a demonstrated history of saving money and being conservative with debt.
Finally, if credit is the issue, look at several lenders to see what grade you are and see what you have to do to move up a notch. Your most recent history is most heavily weighted, so it behooves you to start paying your bills on time right away. In a matter of months the bad stuff will begin to fade and you can move up. A good loan agent should be able to help you.
Your lender owes you more than just a letter declining your application and a smile. Find out what is needed for approval and what you need to do to get there. Then take action and get your home.
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“How do you accomplish that? By paying the lender for a lower rate, or rather, getting a motivated seller to pay it for you, you might be able to get your ratios down to an approvable level.”
Sorry, just a quick question to clear things up in my mind. Do you mean paying more points or getting the seller to pay them? Or paying a larger down?
Rachel, you can improve your chances of being approved by putting more down, having more money in the bank after closing (reserves), or getting a lower rate. It costs money to get a lower rate, and you want to keep as much cash in reserves as possible. So the ideal way to accomplish this is to negotiate with the seller. For instance, if the seller is asking $200,000, you could offer $190,000. Or you could offer $200,000 and ask the seller to pay $10,000 in closing costs. Either way nets the seller the same amount, but the second way makes it more likely that the sale will go through. Of course, the property has to appraise for the selling price of $200,000 but that isn’t usually a problem.
So if your lenders don’t think you make enough money, you might want to consider trading in that expensive SUV for something a bit less expensive. Plus you’ll save on gas and help the environment. It’s a win win situation.
Don’t forget to count all your sources of income too. Many borrowers tend to omit the child support or other non-taxable income.
How badly does it effect your credit score if you apply for a mortgage and are declined? Doesn’t this look bad to other lenders?
Craig, you are right. One thing you can do immediately to improve your situation is get rid of expensive debt. And selling a car you don’t need is one of them.
Janice, that’s a great point. Child support or alimony can be cumbersome to prove–you generally have to prove that you receive it each month and underwriters often want canceled checks. And (surprise!) some exes just don’t want to be that cooperative. I recommmend that if you get this kind of income you make copies of the checks and deposit them separately, as well as make copies of the deposit slips and keep your bank statements. Better than begging from the ex!
April,
The fact that you have been declined for a home loan isn’t on your credit report. What does affect your score is having a lot of inquiries by lenders. However, credit bureaus recently changed their scoring so that a bunch of inquiries by mortgage lenders within a short timeframe isn’t treated that way. So no, shopping for your mortgage or being declined shouldn’t hurt your credit score.
I didn’t think there were any more subprime lenders left. I’ll try the form and see if anyone gets back to me. otherwise I’ll have to clean up my act and wait to be good enough for FHA I guess.
We are applying for finance now for our first home loan and have an existing loan for machinery that we comfortable handle, however when applying for a loan last year a bad debt of my partners appearded from 1997 that was not there when we had our 1st loan accepted, the bad credit was due to my partner sponsering an overseas friend and helping him buy some furniture in which he lost contact with him over the years and he has moved back OS when we got the letter we were able to trace it back to then and of corse can’t trace him, we held our breath said how incredible stupid we were and paid it straight off, we then got a letter to say it has been cleared.
Will this really hurt us now? how long will the mark be there? we have otherwise perfect credit and highly paid jobs.
Wow. While you most likely could have gotten the collection off your record without paying it (statute of limitations on debt is generally only 2 to 4 years, plus the creditor would have had to prove that YOU owed it in the first place), it’s there now.
Your best solution is fast and cheap. Not to be confused with credit repair companies, credit resellers or rapid rescorers often work with mortgage companies. They can update and remove inaccurate or outdated credit information quickly, often much more quickly than you or I can. See my full post on the subject http://www.mortgagecreditproblems.com/blog/not-all-credit-repair-companies-are-evil/
for more information, and good luck. You seem like deserving sorts who can benefit from this service and your credit dings should come off very quickly. Good Luck!
Gina
Thank you so much for this brilliant advice, we have 7 days left of our cooling off period and although we may still be accepted for our loan we will do this immediatley.
thank you : )
Aren’t you nice! Thanks for reading, always glad when my blog is helpful.
Gina, I’m a housing counselor at a non-profit. I like your simple but clear explanation of what a advance or partial claim is. I’d like to follow more of your writing on delinquent and foreclosure issues. How can I do that.
Thank you so much. I always feel great when something I write about helps someone. You can scroll up to the box on the right that says “get our widget” and install it on your own Web site if you like. Or simply click the Orange box (somewhere up there on the right) that says “subscribe” and you can receive the blog and / or comments as a feed.
I am very wealthy and willing to give anyone a loan - Ill help anyone in legit need.
know any where to get a mortgage?