No, lenders are not waiting for you to come by and borrow their money to buy a new house. Buying a house involves serious money, which makes home loan transactions risky. And banks or other financial situations aren’t too willing to lend money to any individual seeking the loan. In reality, most home loan applications face rejection. But you need not be part of the rejected clan. The following tips shall improve your chances of getting a home loan approved.
Review Your Credit Score
Getting a credit report doesn’t take more than a few minutes. But still, most homeowners are lazy enough to not bother about reviewing their credit history and scores prior to putting in a house loan application, believing their scores won’t be a hurdle. Also, most borrowers do not consider identity theft possibilities. Long story short, credit fraud and a poor or low credit score would ruin your chances of getting the mortgage application approved.
Credit activity and scores influence mortgage approval decisions. Generally, 680 is the minimum score needed to avoid a potential lender’s cold snub. Along with bad credit scores, frequent lateness, multiple missed payments, and other negative credit data could decrease your mortgage approval chances.
Therefore, decrease your debts, pay bills on time, and always be aware of your credit status. A credit history cleanup and fixing credit report errors are essential for maintaining a sound credit score.
Know Your Income and Debts
Document debt payments and monthly income. Your lender would require pay stubs of last two weeks at least. Therefore, start collecting them. In case of variable income or self-employment, the underwriting procedure will have a major role to play. For example, you may end up submitting past tax return copies. The lender would use the copies to arrive at your average annual income.
Getting a mortgage approval is basically all about remaining within specific ratios that lenders use for determining your ability to afford a mortgage payment. Bigger debt payments such as student loans or auto loans would limit your approved mortgage loan’s size. These ratios may be tough to crack. Use a mortgage calculator to know your numbers.
Lower Your Debts
Zero debt is not mandatory for mortgage loan approval, but you must decrease your debt figures as much as possible. The lower the debt, the better are your mortgage approval chances. Your outstanding debt level determines the maximum sum you may receive as fresh loan. This includes all forms of debt. For instance, if your credit card debts are too high, you may receive a lower mortgage or your loan request may be declined. As a general rule, your total debts for a month shouldn’t exceed 36 percent of your monthly salary, which also includes mortgage. The number may vary between different lenders.
Therefore, if you are shopping for a mortgage loan, avoid big purchases such as financing a vehicle, cosigning another person’s loan, or buying home equipment with credit card.
Get a Cosigner On-Board
If your salary isn’t big enough to make room for your mortgage loan, get a cosigner with sufficient disposable income. A portion of the individual’s income would be considered for your loan sum, irrespective of whether the person actually lives with you in your flat or would make payments on your behalf. In certain cases, the cosigner’s good credit history may help make up for your poor credit scores. Essentially, the cosigner is assuring the lender you’ll make the mortgage payments on time. In case you fail to pay, the lender would go after the cosigner for the due amount.
The cosigner must be in the know about your financial position and loan requirements and all that’s connected to lending a hand of support. In case you default and the consignor is also not able to clear the dues, not just your credit score, but the cosigner’s score would plummet as well.
On ethical grounds, it’s not right to get your mortgage contract cosigned if you know beforehand you cannot make the payments on time. But if your monthly income is too little for loan consideration and you, along with your cosigner, are confident about meeting the loan’s requirements, the cosigner route is a practical solution.
Start Small
If you cannot possibly afford a mortgage loan for your dream house, cut down your expectations. For instance, consider switching to a townhouse or condo instead of a home with multiple rooms. Accept the fact that your new place will have fewer bathrooms or bedrooms. Or consider moving to a more distant or less attractive neighborhood to open up your options. Though drastic, you may even contemplate moving to another city or state where home ownership cost is not as high. You can always move up to a bigger, more expensive house in the future when your financial position gets better.