YOU CAN QUALIFY FOR MORTGAGE
Nothing can deflate the joy of buying a new home more than worrying about being turned down for a mortgage loan. Avoid disappointment by sharpening your credentials before you go hunting for a loan. The following steps apply to both spouses if both your incomes are being used to qualify for a loan.
1. Job stability. Lenders look for stability of employment. Two years in the same job or at least the same occupation is considered the minimum. It is usually best not to change employment if you have a home purchase in mind unless it’s going to increase your income. Whatever you do don’t start a new business within two years before applying for a mortgage. As much as everyone else loves an entrepreneur, lenders do not.
The best type of loan for a self employed borrower is what is known as a no income verification loan. The lender will make the loan based on what the borrower states as income. Of course, the income stated must make sense for the type of business in which the borrower is engaged. These loans are more difficult to find among local lenders but they are available so check with several sources. You must have excellent credit to obtain this type of loan.
2. Credit. Lenders judge you on how you have paid back your previous loans. Your credit report will show your lender all of your past and current debt. It will also show if you paid on a timely basis. The best advice is to make all of your credit payments on time. You will be asked to explain any late payments on your credit cards, car payment, or mortgage. Don’t say you forgot. Lenders don’t accept this as a reason to be late. If you presently have a mortgage be sure you don’t make payments after the thirty day grace period. Conventional lenders will not make you a mortgage if you have been delinquent in the past twelve months.
There are lenders who will make loans to people with bad credit, such loans usually come with a high cost. If you have bad credit, tell your lender up front. Seek out lenders who will accept your credit problems. Once you establish good credit you can always refinance and get a lower interest rate. Beware of adjustable rate loans that can cause you problems when they adjust.
3. Don’t buy anything new. If you know you are going to be buying a new home, it is not wise to go out and buy a car or make other major purchases on credit. Your total monthly bills will be added up to see if can afford the home payment. The higher your monthly bills, the lower the amount of mortgage for which you will be qualified. Don’t buy anything even if you are going to pay cash. Lenders like to see money in the bank.
4. Savings. When you start thinking about purchasing a home, all of your efforts should be directed to saving money. The more you put down on the purchase price, the lower your monthly payments. A larger down payment also makes it easier to qualify for a loan. There are also many costs associated with home loans that generally add up to about 5% of the loan amount. The lender is going to want to verify that you have enough money to pay these closing costs in addition to your down payment.
In today’s market there are loans available that have no closing costs if you are willing to pay a higher interest rate. A good idea when money is tight at closing, but it could be more expensive if you live in the home for a long period of time. Don’t get your down payment money from a sock under the mattress. You should be able to show that you saved the money yourself so it is best to keep all of your savings in one account. The lender is going to want to see at least two consecutive months of bank statements verifying your savings. Lenders will typically allow you to receive part of your down payment as a gift. The gift giver will be asked to provide a letter stating that he or she made the gift to you and do not expect repayment.
5. Income. Your income is one of the most important ingredients for qualifying for a home loan since it will be used to determine the amount of mortgage you can afford. Your employer will be asked to verify your employment by completing a written verification form. Alternatively, you can provide a current payroll check stub and two year’s tax returns to prove your income. If you are self employed you will be required to pro¬vide a copy of two years tax returns. For qualifying pur¬poses, only the income you show on your tax return will considered.
6. Property. Look for a sound home in a good neighborhood where property values are steady or rising. The home you contract to buy will be appraised. The appraised value should be close to your purchase price. If the appraised value is less than the amount you are paying, consider renegotiating your purchase contract. A low appraisal will mean the lender will use the lesser of the purchase price or appraised value in determining the maximum loan that will be made on the property. Thus you would have to put more money down.
On used homes, a termite inspection and roof inspection may be required by the lender. This protects both you and the lender and typically is nominal in cost. You may be able to negotiate with the seller to pay for these inspections. If repairs are needed, the lender will require that they be completed before you can close on the loan. Such repairs are usually the obligation of the seller, but the terms of your purchase contract will prevail.
7. Pre qualify. Visit a lender who will show you what type of financing is available and the maximum payment you will be able to afford. That will tell you how much home you can afford. Arranging your financing in advance will give you a strong bargaining position with a seller and will help you be realistic in your home hunting.
8. Shop around. Talk to several lenders. Work with someone who you are comfortable with, who has intelligent responses to your questions and does not use high pressure tactics. Look for a lender that has several different types of loans to offer and then ask lots of questions.
9. Educate yourself. Learn as much as you can about mortgage financing and you can save tens of thousands of dollars over your lifetime. Read articles, search the internet, check out books from the library, attend lender seminars for new home buyers or ask your local financial institution for information that may be available.
10. Alternatives. If all attempts to finance your new home fail, ask your Realtor to identify property where the seller is willing to do the financing. Most sellers offering this type of financing are anxious to sell and might not be so fussy about a cloudy credit history and other institutional lender concerns.
Experienced, nationally published writer with twenty five years of banking, mortgage banking, and real estate experience. Academic background as adjunct college instructor and course developer. BSBA, MBA. Former bank president and chairman of the State of Florida Investment Advisory Council.