Understand The Current Mortgage Guidelines And How To Get Your Loan Approved
Several homeowners believe that getting approved for a mortgage loan is very difficult and several believe they cannot get mortgage approval at all. Unfortunately, some of the information about mortgage qualifications is true. Many lenders now have stronger guidelines, but understanding how loan approvals operate now can help you better prepare yourself for the loan process.
Tougher Loan Guidelines
The biggest change in mortgage approvals is how the lenders 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 write 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 mortgage 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 house payment. If your DTI is over 50 percent, the chances of the loan getting approved is lower.
Some programs like FHA home loans allow for a higher DTI ratio and have some flexible mortgage guidelines. This is why several first time home buyers decide to use the FHA loan program. FHA loans have lower credit score requirements, require a smaller down payment and have higher DTI ratio requirements.
Credit Score Requirements
Credit score requirements have also changed for mortgage loan approvals. several lenders now require at least a 620 credit score for loan approval. Some programs like conventional mortgages 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
Several mortgage loan programs now require cash reserves for mortgage loan approval. Cash reserves are the amount of money 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 $1500, the mortgage company could require $9000 in reserves.
Improve Your Chances For Mortgage Approval
With the tighter credit guidelines, there are some important steps you can take to assist with the mortgage approval. First step is to have the highest credit score possible. Reducing credit card debt is one of the easiest ways to increase your credit score, since credit card debt has an immediate impact on your score. Check your credit report regularly for any inaccurate information. Work with a credit repair company to get rid of 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 loan approval.
Use Accurate 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 mortgage, use accurate income so that you are approved on the correct information. Using inaccurate information could affect the approval of the loan later in the process.
David White is a Senior Mortgage Consultant who specializes in Dallas home loans. David has over 12 years experience in the mortgage industry and understands home mortgage loans.
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