Mortgage Basics 4: Set yourself up for APPROVAL

My clients will not get approved for a loan for 3 main reasons:

1. credit score

2. Debt to Income ratio

3. Not enough money in the bank

Let's talk about how we can get around or prepare for these three obstacles in ADVANCE so that these items don't slow you down or keep you from getting a home loan.

1. Credit:

Some programs will let you get a mortgage all the way down to a 580 credit score, however, some specialized programs require a higher credit score- (such as down payment assistance or bank statement only programs) usually around 640.

REMEMBER! Lenders look at your MIDDLE SCORE between Equifax, Transunion and Experian.

There is no leeway on the credit score requirement, you either have it or you don't. There may be ways for the lender to raise your score by paying down some items through rapid re-scoring, I'll talk about that on another blog.

TIPS: 1. Keep your balances to limits under 30% on your revolving accounts (credit cards).

Example: Credit card with limit of $5,000 keep a balance under $1,500.

2. If you are an authorized user with someone on a credit card and they aren't good at paying their bills on time, GET OFF THAT CARD.

3. Pay all of your bills on time

4. Do not have any accounts with a balance in dispute, you will have to either pay off the balance or remove the dispute and have your credit pulled again.

5. Try to have 3 separate trade lines (2 credit cards and an auto loan).

REMEMBER: Having a car loan with a large payment can really hurt what you qualify for. A $500 per month car loan could prevent you from buying a house, contact your lender first.

2. Debt to income ratio (DTI)

The debt to income ratio is basically your income versus your monthly bills and the proposed house payment. The formula is your income divided by your debts and proposed house payment added together.

Example: $5,000 month income

$300 car payment

$275 credit card payments

$2150 total proposed mortgage payment.

{Bills ($575 total) + proposed house payment ($2150)}/ Income ($5,000)

$2,725/ $5,000 = 54.5% debt to income ratio

In the example, we have a debt to income ratio of 54.5%. Most loans will not allow you to go above 50% DTI ratio.

TIPS:

1. Manage your finances! Keeping auto loan payments low and credit card payments low will help you to have a lower debt to income ratio. The only 2 ways to lower this ratio is to either have less/ lower monthly bills or to make more money. Bottom line is "live within your means"!

3. Money in the bank (Assets)

If you take a look at my "down payment" blog you will see there are options for $0 down loans, however, you will likely still need closing costs and pre-paids money. You can use gift funds from a relative, or seller credits to help with your cash to close, but money in your own bank account is often easier to access/ source and does not require you to possibly rely on a lender/ seller credit to get the deal done.

TIPS:

1. Start saving money NOW! Even if it's just $100 a month, it will help you when you need some extra cash to close on a home.

2. consider down payment assistance or 0% down programs.

3. consider a gift from a relative

I hope this helps, feedback is always appreciated! Feel free to email or call me!


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