Several consumers believe that getting qualified for a home loan is very hard and many believe they cannot get loan approval at all. Unfortunately, some of the information about loan qualifications is true. Many lenders now have stronger guidelines, but understanding how mortgage approvals work now can help you better prepare yourself for the loan process.
Stronger Loan Guidelines
The largest change in loan approvals is how the mortgage companies calculate income. For self employed borrowers, this can be very tough. Basically, lenders are now using the income reported to the IRS as taxable income as the income to qualify for the loan. If you take off a lot of deductions on your IRS 1040, then you might have a tougher time qualifying for a mortgage.
Debt-To-Income
Another factor in the loan approval is the debt-to-income (DTI) ratio. This ratio is based on the amount of debt compared to the monthly income including the new mortgage payment. If your DTI is over 50 percent, the chances of the loan getting approved is reduced.
Some programs like FHA home loans allow for a higher DTI ratio and have some flexible underwriting guidelines. This is why many first time home buyers decide to use the FHA loan program. FHA mortgage loans have lower credit score requirements, require a lower down payment and have higher DTI ratio requirements.
Credit Score Requirements
Credit score requirements have also changed for loan approvals. several mortgage lenders now require at least a 620 credit score for loan approval. Some programs like conventional mortgage loans will require a higher credit score depending on the amount of the down payment. If you are planning on a down payment less than 20 percent, expect to need a credit score at least over 680. This is due to the private mortgage insurance requirements and PMI requires credit scores over 680.
Cash Reserves
Many mortgage loan programs now require cash reserves for loan approval. Cash reserves are the amount of funds needed after the mortgage closes. Many programs require at least 6 months reserves based on the new mortgage payment. For example, if your mortgage payment is $2000, the mortgage company could require $12000 in reserves.
Better Your Chances For Loan Approval
With the stronger credit guidelines, there are some crucial steps you can take to help with the loan approval. First step is to have the highest credit score possible. Reducing credit card debt is one of the easiest ways to improve your credit score, since credit card debt has an immediate impact on your score. Check your credit report on a regular basis for any mistakes on the report. Work with a credit repair company to remove any inaccurate information.
Save Your Money
Save your money and place your funds into a savings account. Keep in mind that you want to save for the down payment and have some money left over for any cash reserve requirements. Cash around the home cannot be used as a verifiable source of funds. Lenders require all funds to be verified prior to mortgage approval.
Use Correct Income Information
Make sure that you are using income reported to the IRS as your monthly income. If you make $70000 a year but write off $10000 in expenses, your actual yearly income is only $60000. When applying for a home loan, use the correct income so that you are approved on the correct information. Using inaccurate information could affect the approval of the mortgage later in the process.
David White is a Sr. Mortgage Consultant who specializes in Dallas home loans. David has over twelve years experience in the mortgage industry and understands home mortgage loans.
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