Starting Over in a Tight Lending Market…Qualify for a Mortgage

Since I’ve been in the mortgage lending industry for over 20 years, I can tell you about the pros and cons of trying to start over in a tight lending market.

It’s not going to be easy.  Having the best credit score doesn’t guarantee that you will automatically qualify for a mortgage to get the best rate or even a loan. In addition, you will need to get mortgage pre-approval from a lender prior to purchasing a home.  You will want to check some of the following difficulties that may stop you from qualifying for that low interest rate that nobody tells you about. 

Are You Over-Extended In Debt?

If you are, pay off some of those credit cards.  If you have too many credit cards you might want to think about closing some of them.  Most lenders prefer that you have at least 4 open credit cards in good standing.  Do not spend over 50-60% of your credit line limits.  By staying within this limit, you will be able to keep your FICO score in great standing.  In addition, the balances on your revolving credit cards will be reduced to a minimum so that it doesn’t severely impact your DTI ratio (debt-to-income ratio) over 45% (FHA home loan standards). Most lenders will calculate 2-5% of the outstanding revolving credit card balance when determining the average monthly debt. 

 Any fixed monthly payment on an installment card will be used entirely.  These are cards with a monthly fixed payment, such as cars, boats, child support payments, school debt, furniture, etc.  Bottom Line……….do not run up those credit cards.

If you are married and applying for a FHA home loan and one spouse’s credit is worse than the other, the debts of both spouses will be used,   Let me be clear, the debt will be used…not the bad FICO score of the spouse.  So, if you thought that you would eliminate your spouse because of bad credit or overextended debt and qualify for a mortgage by yourself, then be aware that it is not allowed on a FHA home loan.

Have You Been On Your Job Long Enough?

If you’re planning on retiring……….don‘t quit that job until you have secured a home loan.  Limited funds originating from a pension or social security may limit your opportunity to qualify for a loan. 

If you have recently changed  jobs………. wait until you have completed at least 2 years on the job or you can prove that the new job change was a lateral move in the same profession.  

Will You Be Left Broke When The Loan Closes?

Many lenders will require that you have enough reserve money remaining after the loan closes.  Be sure to have at least 2-6 months of savings, (401K/IRA, CD’s, stock, etc.) sitting in the bank to qualify for the loan. 

Are You Paying Too Much For That Property?-

The largest and most unexpected reason for loans being denied or suspended is due to the appraised values returning with a lower value than the offered purchase price. 

Do You Want To Rent Your Current Property?

Sounds like a great idea, but may seriously impact your DTI of the house that you want to purchase.  Why?  Lenders want you to have an equity interest of at least 25-30% in the current property plus 6 months of reserves.  If you do not meet these requirements, then you will need to have 12 months reserves and have enough income to afford both homes. 

Since the 2007 Real Estate Bust, lenders have been refining their guidelines to decrease risk and this is part of their policy called “Buy and Bail”. This means you buy a new property at today’s low interest rates and then you dump the old property. 

Final Words For Thought

To that end, allow me to make some suggestions that may help to overcome some of these obstacles

  1. Be sure to pull credit reports from all 3 bureaus before applying for a home loan
  2. Consider applying for a FHA loan if your funds are limited.  Your down payment is 3.5% of the purchase price and closing costs can be gift money from family member.  FHA guidelines are less stringent than conventional guidelines
  3. Pay off any excess revolving and installment debts that will exceed 45% DTI, including your spouse’s, if it’s an FHA loan.
  4. Consider requesting assistance from a family member that will sign on as Co-Borrower to help qualify for another home.
  5. Save enough money for down payment, closing costs and reserve money, even if you are receiving gift money.  You will need some “skin” in the game.
  6. Before paying for an appraisal, do your homework and make sure that the property will appraise at the offered purchase price.  If by chance there is a lot of competition for that property, do not overbid by 10-12%.

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