How To Improve Your Chances Of Getting A Housing Loan Approved

To the vast majority of individuals, purchasing a house is the largest financial transaction they will ever make. It is an exciting, nervous and somewhat paperwork process. The most important stage of this trip is the mortgage approval process- a nightmare that can be as nightmarish as it needs to be. Lenders are now more than ever picky and even nowadays a major portion of loan applications is either rejected or postponed as a result of preventable problems. The positive fact is that the process of loan approval is not a lottery; it is a pre-calculated process according to a list of clearly determined items.

 Knowing what lenders seek and making proactive moves months or even years prior to your applying will make you a nervous applicant into a well-qualified, confident borrower. This guide will take you through the key tips to bolster your financial picture and come out with winning chances of getting a housing loan with good terms.

Learn to Read and Improve Your Credit Score

The most important aspect of your mortgage application is your credit score. It is a statistical overview of your creditworthiness and it informs the lenders about how dependable you have been regarding handling debt in the past. The minimum acceptable credit score is 620 on most traditional loans, whereas FHA loans can accept a minimum of 580, though striving to achieve the lowest possible is a mistake.

The tiered pricing is applied by the lenders: the higher your score the better you get as you are sure to get a much lower interest rate. An example is that you would save tens of thousands of dollars over the life of a 30-year mortgage by the difference between a 680 and a 760 score. Hence, prior to starting to house hunt, you need to get your credit reports in AnnualCreditReport.com and check them thoroughly to identify any mistakes, including the presence of accounts that are not yours or late payments. Arguing and fixing these errors will be a fast way to improve your mark.

In addition to correcting the errors, you need to take positive steps to control your credit life during the months that lead to the application. Begin by paying bills in time-payment history takes up 35 per cent of your FICO score. The second thing to concentrate on is a credit utilization ratio, which refers to the ratio of the sum of revolving credit you use in relation to your total credit. Lenders prefer to see utilization of less than 30, and preferably less than 10. This will imply that we pay off our credit card balances and not move them around.

Notably, do not open new credit accounts or close old ones within the year of application. New questions temporarily decrease your score and closing old accounts also decreases your average account age and total available credit, which is both damaging to your score. Lastly, do not buy anything on credit, e.g. a car or furniture until your loan closes. Having a stable and risk-free credit profile throughout the application period is an indicator to your lenders that you are a responsible borrower.

Stabilize Your Employment and Income History

Lenders do not merely loan you money; they are assigning bets on whether you will be able to repay it every 15 to 30 years. In order to have confidence in that bet, they need a predictable, testable history of income. The gold standard means that one has worked in the same field or industry that is at least two years long, with income that is steady or rising. In case you are a salaried employee, the lenders will usually require your latest pay stubs that span 30 days and W-2s of the last two years.

Job changes, particularly changing industries, may be a cause of concern, as well as employment gaps. When you have switched jobs, then you should attempt to switch jobs within the same line of business and where possible, get an offer letter or confirmation of the new salary before submitting an application. The lenders would like to know that your source of income is stable and that it would not run out.

In the case of self-employed borrowers, the road to approval should be prepared even more thoroughly. As self-employment income may vary, your tax returns of the last two years will be examined by the lenders, and in most cases, the net income is averaged to calculate the qualifying earnings. They can also demand profit and loss account, bank accounts and a letter by your accountant. The first tip is to make sure that you file your tax on time and that you are reporting enough income to indicate your true earning ability- you can deduct expenses aggressively to reduce your taxable income, but you will also be reducing the amount of income that the lenders can use to qualify you.

Also, having a business bank account and keeping good records can facilitate the process of documentation. Incidentally employed or self-employed, the most important thing is to be consistent: no major career changes or substantial work hour decrease during the six months preceding your application, as any fluctuation would compel a lender to resume the verification process.

Manage Your Debt-to-Income Ratio

A debt-to-income (DTI) ratio is a very important measure on which lenders base their decision as to what proportion of your gross monthly income is spoken to by current debt obligations. It is determined by taking all your monthly debt payments (credit cards, car loans, student loans and the new mortgage payment offered) and dividing by your gross monthly income.

The majority of traditional lenders will accept a DTI of 43-50% depending on the circumstances of the loan. A lower DTI is an indication that you have a lot of financial breathing room to deal with your mortgage even in case of some surprise costs. A high DTI on the other hand implies that you are overexerted and are not able to afford to pay your loan hence the lending institutions do not readily grant your loan.

The process of improving your DTI is simple yet strict. The best option is to settle or clear outstanding debts first before seeking a mortgage. Pay attention to high interest revolving debt such as credit cards since these will affect your monthly payments most. Even clearing your credit card accounts by thousands of dollars can have a significant effect of decreasing your minimum monthly payments and raising your DTI. The other strategy will be not to incur any new debt during the year before your application.

A new car credit or a new store credit card can raise your monthly payments and bring your DTI to an unacceptable level. In case you have large student loans, then think about whether an income-driven repayment plan would reduce your monthly payment, though be aware that lenders might either use the actual amount of payment or a calculated percentage (in most cases 1% of loan balance). When you offer a DTI that leaves plenty of space to cover your new housing payment, you are financially responsible and you have a high likelihood of being approved.

Save for a Substantial Down Payment

The amount of your down payment will not only determine whether you are approved but also the conditions of your loan. Whereas 20 percent down is frequently quoted as the optimal, as it kills any private mortgage insurance (PMI) and reflects great financial health, most borrowers are able to acquire a loan with much less. Nevertheless, the bigger the down payment, the lesser the risk of the lender, and this translates to improved interest rates and monthly payment. It also boosts your loan-to-value (LTV) ratio, which is the percentage of the value of the home that you are borrowing.

A low LTV will make you a better borrower and this is especially relevant when you do not have a perfect credit score. Furthermore, a huge down payment shows that you are disciplined to save and that you have a stake in the game and thus are less likely to default.

The first step to creating your down payment fund is to establish a goal that is based on the price range of the homes you are considering. Target at least 5%-10% of the purchase price but 20% is ideal. Open a separate savings account and have it done automatically at the end of every month and transfer some money to it.

Lenders will require that your down payment money are verifiable sources- seasoned money that has been in your account at least 60 days, or gift funds that are well documented as having been gifted by a legitimate source such as a family member. Do not transfer money across accounts just before one applies because this leaves a trail of paperwork that has to be examined by the lenders.

Moreover, one should be careful with money received in form of cash gifts or any unconfirmed sources since they might not be accepted. In addition to the down payment, also remember to save up some extra funds towards closing costs, which generally amount to between 2 and 5 per cent of the loan, and as an emergency fund to cover at least three to six months of housing expenses.

Get Pre-Approved and Elude Financial Pits

Getting a mortgage pre-approval is one of the most effective actions of increasing your likelihood of getting a loan approved once you begin browsing houses. A pre-approval is much better than a pre-qualification; this is where a lender checks your income, assets and credit to see how much they will be ready to loan you. Not only does this give you a clear budget but the sellers will also know that you are a serious and credible buyer.

More importantly, a pre-approval enables you to spot and resolve any possible problems- like mistakes on your credit report or lack of the necessary paperwork- before you are bound by contract and have to rush to a closing date. It is basically a dress up call of the entire underwriting procedure where you can have time to rectify any issues without the pressure of time.

After being pre-approved, your conduct becomes even more important. The time between pre-approval and closing is called your quiet period in your finances. At this period, you should not engage in any activities that can change your financial profile. Avoid big spending on credit and buy a new car, furnish with a loan, or even charge up a big vacation cost can put your DTI up and make the lender reconsider your application. Unless necessary, do not switch jobs or become self-employed as this may upset income verification.

Also, never deposit large amounts of cash as it is difficult to trace them, and never co-sign any loans on behalf of any family member or friends because that loan will be considered as yours in the eyes of that lender.

Most refusal in loans is not due to the qualifications of the borrower but because of the financial activity between pre-approval and closing. Through financial discipline in this window, you know that the image that you project in your application will be the same until the time that the loan funds.

Select the Right Lender and Loan Program

Not every mortgage lender is the same and the right choice of partner can make a tremendous difference in whether you will be approved or not. There are various underwriting requirements, products and risk-taking that vary with large banks, credit unions, mortgage brokers and online lenders.

A non-traditional credit profile (self-employed, high DTI, etc.) might be better suited to a more specialized non-bank lender or a mortgage broker who has access to a number of investors. On the other hand, in case you have a simple financial history, a big bank could provide good rates. To avoid your credit inquiries being counted as multiple events and thus being scored as such, it is prudent to apply to at least two or three different types of lenders within a brief time frame (typically between 14-45 days) so that your credit inquiries can be considered as one instance.

Another thing that is essential is to select the proper loan program to your situation. The conventional loans (Fannie Mae and Freddie Mac) are a preferred option among borrowers who have good credit and good down payment although it has strict DTI requirements. FHA mortgage is supported by Federal Housing Administration and is more lenient on bad credit scores and high DTIs, thus it is the perfect mortgage to first-time buyers or individuals with less-than-perfect credit. VA loans are zero down loans, and they are available to deserving members of the military and veterans, and their underwriting is not strict.

 The USDA loans are also beneficial to the rural home buyers. It is also possible to understand the specifics of any program and apply to a loan where you are a fit. These choices will be taken by a good loan officer, but it is important to do your own research in order to ask the right questions. It is important to keep the goal in mind, which is not only approval, but approval that is sustainable on your part. A good lender will be responsive, communicative and will be ready to explain the process and this will make all the difference between a worry-free closing and a stressful experience.

Conclusion

Getting a housing loan approval might look like an impossible task, but it is eventually a foreseeable process that is established on the ground of financial planning and sound decision making. With a proactive attitude, including maximizing your credit score, securing employment, balancing debt-to-income ratio, saving a significant down payment, getting a pre-approval, and correctly choosing your lender and loan program, you will be able to become a low-risk borrower in the eyes of underwriters. All these steps support each other and make up a strong image of financial stability and responsibility.

The time spent in planning, months before you submit your application, will not only be rewarded with high chances of approval, but also with reduction of interest rates, fewer surprises during closing transactions, and less worry on the home buying process.

Finally, it is not a lottery to achieve homeownership, but it is a plan. Lenders are interested in giving loans to qualified borrowers and by posing as such, you identify the interest of the lenders and yours. Resist the temptation of speeding up the process and the urge to undertake significant financial adjustments after you have started with your application.

Rather, consider the mortgage approval process to be a chance to secure your financial base- a base that will be of great use to you in the long run once you get the keys to your new house. By planning and executing it, you may be assured that you have done all that you could do to make your homeownership dream a reality by walking into the office of the lender.

Also Read: Bangladesh: House Building Finance Corporation Loan Recovery Rules