Those of you waiting to take the step from renting to home ownership may want to step it up. First, unless Congress extends the deadline, that first-time home buyer credit is going away the end of November. Of course those on the sidelines face challenges--often bad credit, a little short on income, insufficient down payment, or lack of time on the job. But you don't know until you try, right? With a good loan agent, even a decline from a lender can be a useful tool. Here's how to make the most of that information.
Applicants for mortgages get declined for a few reasons. Bad credit, too little reserves, or insufficient income are the biggies. But just knowing that you have been declined for a home loan isn't enough. A good loan officer should be able to tell you EXACTLY what caused the rejection of your loan application, what you can do to get approved, and how long (approximately) it will take.
For example, you may have been declined because of your debt to income ratios. Your ratios reflect your ability to pay your loan--even good credit doesn't help if you can't realistically make the mortgage payment. So you either have to make more money, spend less money, find a co-borrower, or buy a cheaper house. The first two options involve budgeting. if you aren't comfortable with a budgeting process, call one of many reputable counselors and get help with this--as they say, if you fail to plan, plan to fail. Probably the easiest way to influence your ratios is to spend less money. Ask your loan officer what your ratios are and what they would have to be to get approved. Then take a look at your debts. Often, a lender won't count a debt against you if you are within 10 months of paying it off. Look at your budget. Can you throw more money at a debt with a high payment to make it go away? This helps you in two ways. First, it gets you used to paying more each month and spending less, which is useful if your new mortgage payment will be higher than what you're spending on housing now. Second, it makes you more qualified to buy a home.
If bad credit is the main reason for your application getting bounced, only time can cure that. Your credit rating reflects your willingness to pay. How much time depends on the severity of your credit errors. Your loan agent should be able to help you with that too; good ones understand underwriting guidelines very well. A foreclosure, for example, takes a minimum of three years to put behind you credit wise. Use that time to develop better habits, like paying on time and avoid over-using credit. It can be useful to ask your credit card companies to freeze (not close) your accounts to keep you from using them while you work at paying them off.
If you have bad credit but make plenty of money, and you find a deal on a house that's just too good to let go, you are in a better position to buy. Bad credit lenders are still in business (although there are fewer of them) and if it looks like you can afford their high rates they will often finance you. Be careful about prepayment penalties and start working on your credit so that you can refinance to a better loan as soon as possible.
Those with insufficient assets face a similar challenge to those with too little income. Budget for savings and watch your accounts grow. Even having enough for two months' of expenses (this is called reserves) makes a big difference on your loan application. Those who are self-employed or on commission need more--at least 3 to 6 months' of expenses to look good. Lenders have learned that even people who don't have bad credit can't pay when they lose their jobs. You can't get blood from a turnip. So, while your credit rating shows your willingnesss to pay, and your income reflects your ability to pay, your assets or reserves demonstrate that you will be able to pay even if you have a financial setback.
A good loan agent can help you plan for the day your application will be accepted. Keep this person's contact information and return the favor by taking your business there when you are ready to buy.
