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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 you.

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 are TransUnion, Experian and Equifax.

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.



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