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You’ve found your dream home, but are having difficulty getting a mortgage. What’s an applicant to do?
Loan offers are all over the place, but don’t be fooled into thinking that everyone is automatically approved. Lenders are no longer willing to lend large sums to eager borrowers who may not be able to hold up their end of the promise. New federal rules that took effect in January are intended to prohibit risky loans.
Fortunately, there are actions you can take to increase your chances of getting a mortgage.
1. Do your homework
Contact multiple lenders to get an idea of the standards you need to meet to qualify for a loan. They may tell you that it varies by applicant, but most have a general set of criteria in place. (Ideally, this step should be taken before you begin looking for a house.)
Because of the new rules, “mortgage lenders are asked to comply with two new requirements: the Ability to Repay rule and Qualified Mortgages,” reports CNN Money. Here is a brief overview of what the two rules entail:
- Your debt-to-income ratio will be analyzed to confirm that you are indeed able to make timely payments over the duration of the loan. Your debt should be less than 43 percent, although exceptions can be made.
- Lenders must verify the assets, liabilities and income of the loan applicant.
- The loan repayment period should not exceed 30 years.
Although your lender may have additional criteria, keep this short list in mind. Also ask potential lenders what credit score you’ll need to qualify.
2. Shop around
Traditional banks are often a bit more stringent than credit unions. The New York Times says that “because credit unions typically keep a hefty portion of their loans in portfolio (rather than sell them on the secondary market), they have flexibility in tailoring mortgages to better meet consumer needs instead of the expectations of investors.”
So if you know that you may have a difficult time qualifying, credit unions may be the better option.
3. Be cooperative
Provide all of the requested information in a timely manner when you attempt to pre-qualify for the loan or obtain preapproval, which banks are more reluctant to grant these days. After that, comply with all requests for paperwork. There’s nothing worse than being denied because you failed to follow instructions or paperwork deadlines lapsed. Says Credit.com:
When your application is approved it’s important to check the underwriter’s checklist of borrower conditions. This list will specify everything that you need to do in order to ensure that their loan will be approved for closing. The conditions often include requests for alternative and supplementary documentation, explanation and correction of anomalies, and verifications and attestations.
Lenders don’t have time on their hands to chase down applicants for paperwork and explanations for vague responses.
4. Plead your case
Failing to meet the lender’s criteria doesn’t automatically disqualify you for a mortgage. You may simply have to ask the lender to take a second look or make an exception to the rules, if possible. It may also be necessary to provide additional documentation to strengthen your case.
5. Get a co-signer
Do you know someone with stellar credit and verifiable income who is willing to co-sign a loan for you without actually residing on the property?
But proceed very cautiously and make sure your potential co-signer understands the risks. If you don’t pay, your co-signer is responsible for the entire loan. For that reason, our general advice is that people should not agree to co-sign a loan for anyone, even a family member or close friend.
However, the co-signer may be confident in your ability to pay because of your complex situation, such as self-employment or a substantial amount of expected income that the lender may not be unaware of.
6. Be patient
Maybe the time isn’t right for you to purchase a home. Put it off for a year.
Identify the problem areas that kept you from obtaining a mortgage and make improvements. Reduce outstanding debt balances, boost your income and build a cushion. Save for a larger down payment.
7. Lower your expectations
Look at properties that are more comfortable financially. Perhaps a condominium would be suitable, or a less affluent neighborhood than the one you’ve been eyeing.
Still no luck? It may be time to revisit the drawing board to determine if you really should be in the market to buy a home.
Do you have any additional tips? Let us know in the comments below or on our Facebook page.