Home Buying 101

The Four Pieces of Qualifying For A Loan

This article is intended to help potential home buyers who are not familiar with the process of applying for a mortgage increase their chances of qualifying for a loan. Too many times, I have seen hopeful buyers disappointed by not being able to qualify for a loan, when a few simple preperation steps might have made all the difference. Below are the four primary qualifying factors in obtaining a loan. This page is a work in progress, so please check back often for additional information.
Check Your Credit

More than ever before, your credit history and score are what will utimately get you into your new home...or not. If you want to quality for a loan, it's time to be realistic about your current credit situation. Fortunately you can raise your credit score within a few months by following a few simple steps.

Six months before applying for a loan, check your credit reports with the three credit bureaus to make sure everything is accurate. You can check each of your three reports for free once each calendar year by going to http://www.annualcreditreport.com.

Make sure that all of the items are, in fact, yours. The day you apply for your first home loan is not a great time to find out someone has been opening accounts using your identity.

Check that the balances are being reported accurately. Credit cards reporting near maxed out limits will lower your credit score. If you can pay your balances down to 20% or less of your available credit, that will go a long way toward improving your credit score.

Look for duplicate items . A single student loan will sometimes show up several times since they are often sold or transferred to new servicing companies every few years. If you have the same $5,000 loan showing up three times, it can drag down your credit score since it translates into a $15,000 debt instead of a $5,000 debt.

Items such as collections, judgements and liens will need to be resolved before applying for a loan in most cases.

If you do have items that need to be corrected, you can dispute them online with each of the three credit bureaus.

If you take these steps well in advance of applying for a loan, your credit reports will have time to reflect the positive changes which will in most cases increase your credit score. Every point counts, so cleaning up your credit is the most important step you can take.

Analize Your Income Unless you are sitting on a nice sum of cash, you are going to need to show a steady stream of income. A lender will want to see two years of prior income documentation. While a full time W2 income will be viewed most favorably by lenders, being a 1099 freelancer or self employed does not immediately get you disqualified. For example, if you are an electrician and work on various contracts through your union, a lender will average your gross income over the past two years from all jobs you worked since all of your jobs were in the same field. Your income will be verifed via your W2 or 1099 pay stubs, so be sure to keep all of your pay stubs for the past two years. Lenders will also check your past two years' income tax returns. If you made $100,000 at your W2 job last year, but claimed a $20,000 loss for a business you have on the side, the lender will use $80,000 as your income for that year. The more accurate documentation you can provide, the better.
Assess Your Assets Lenders will want to review your last two months of assets to verify you have enough cash on hand to close your loan along with two months cash reserves in most cases. Assets include checking and saving accounts, stocks, mutual funds, pretty much any liquid asset. You will be required to show where large deposits originated via a pay stub, stock sale or gift letter. Money that appears out of the blue is not a good thing. The more accurate records you have to supply, the more quickly your loan process will go.
Determine Your Debts To increase the chance of qualifying for a mortgage, your total monthly debt should not exceed 40% of your monthly income. The percentage will vary a little depending on the type of loan program you are applying for, but 40% is a good target for most loan applicants. For example, if your gross monthly income is $10,000, your total debt needs to be less than $4,000. Total debt includes your mortgage payment, insurance, PMI (if applicable), car payment, school loans, credit cards, and any installement debt. Items such as utility and cell phone bills are not considered to be debt since they are necessary items.

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