Improve Chances of Mortgage Loan Approval Helps Home Buying
As the home market continues to soften many buyers are finding that
while there are a wide number of homes to choose from but the availability
of home mortgages may not be as open. Many lenders are
tightening restrictions on mortgage loans due to rising number of foreclosures. If
you are considering the purchase of a home in the current market, or if you are a homeowner consider a
home refinance, then it is important to learn
what you can do to increase your changes of obtaining the mortgage
loan approval given current market conditions.
First time home buyers frequently face the most challenges when trying
to obtain a mortgage. This is because first time home buyers have no
equity in a prior home which they can use for a
home down payment. In addition, first time home buyers also face the reality that in many
cases their credit history may be non-existent or somewhat spotty.
As a result many first time home buyers find they must look for 100%
financing. This means private mortgage insurance, which can be
expensive, or a piggyback loan. A piggyback loan is a combination of two
loans that are issued at the same time. The actual cost of a piggyback
loan will depend on the borrower's credit score. If the borrower's
credit score is less than 700 then the option of obtaining a piggyback
loan typically disappears. If the borrower's credit score is less than
620 the option of obtaining 100% financing also usually vanishes.
Generally, if at all possible, it is more advantageous to make a down
payment when you purchase a home. At a minimum, you should try to put
down 5%. In most cases lenders will also want to make sure that you have
funds set aside in reserve for at least two months of interest,
principal, taxes and insurance.
Remember also that you will need sufficient cash reserves for
home closing costs or settlement costs. If you are not able to obtain 100% financing you
should plan to have between 2-5% of the total sales price in reserves
for closing and settlement costs.
In addition to making sure you have those cash reserves, it is also a
good idea to make sure that you pay down as much debt as possible before
you apply for a mortgage. You should also work on
improving your credit score as a higher credit score can provide more financing options for
Keep in mind that lenders will base their decision to approve your
mortgage loan in many cases on the standard debt to income ratio. Most
lenders use a 28-36 ratio. This means that your monthly mortgage payment
cannot exceed 28% of your monthly income. In addition, your total debt
payments cannot exceed 36% of your monthly income.
Ideally, it is best to wait on pursuing the purchase of a home until you
have saved a sufficient amount of cash to cover your down payment,
closing costs and settlement costs. You will improve your chances of
being approved for a mortgage loan as well as save money due to the fact
that you can typically obtain a fixed rate mortgage that is some 1.5
percentage points lower if your credit score is at least 760 than if it
is in the low 600s.
At least six months before you plan to apply for a mortgage it is
important to go ahead and request a copy of your credit report and begin
working on completing any errors which may be present. If you are able
to document that an item is inaccurate you can make a request for it to
be removed. You can always engage a trusted law firm to
repair your credit report. For those items that are accurate but derogatory take the
time to begin paying down debt in an effort to improve your credit
score. Remember that you are entitled to one free credit report each
year from each of the three credit reporting agencies. Those agencies
Avoid making some of the most common mistakes by many home buyers,
especially first time home buyers. It is best to avoid any big ticket
item purchases when you are planning to buy a home. This is imperative
even if you have already been approved for a loan but have not yet
closed on the property. Many buyers make the mistake of thinking their
loan is a done deal and then go out on a spending spree for new
furniture for their new home. This is a critical mistake that can cost
you your loan.