How To Improve Your Chances Of Getting A Mortgage Loan
If you’re hoping to own the home of your dreams one day, you’ll eventually need to apply for a mortgage. But if you’re concerned about possibly not being able to get a loan, here’s some advice to help increase your chances of getting a mortgage.
Improve Your FICO Score
Your FICO score reflects your behavior as a borrower over time. As such, it could take months or even years to see a noticeable improvement.
So if you have bad credit history that’s dragging down your score, or if you want to raise a “good” score to an “excellent” score, take action to improve your score well before you apply for a mortgage loan. Here are a few steps you can take.
Pay Your Bills On Time. Your reputation for paying back the money you’ve borrowed accounts for the largest portion (35%) of your FICO score. If you forget when bills are due, consider setting up automatic payments to make sure bills get paid by their due date.
Reduce Your Credit Card Balances. The amount of money you owe makes up the second largest portion (30%) of your FICO score. Having cards that are close to being maxed out will drag down your score.
Don’t Close Existing Credit Cards. The longer you manage debt successfully, the better a loan prospect you are. Part of your FICO score is a reflection of how long you’ve had your oldest account and the average age of all your accounts.
Don’t Apply For A Lot Of New Credit. As previously mentioned, lenders look at how long you’ve maintained your accounts, and like to see responsible payment over time. So if you open a lot of new accounts at once, you’ll look desperate for quick cash. Lenders see this as a red flag, so this can lower your FICO score.
Stay At Your Job
Mortgage lenders like income stability. If you’re a job hopper, or if you leave your job soon before you apply for a loan, you might look like a higher risk than if you’ve been employed consistently over the past several years.
Reduce Your Overall Debt
Lenders use the 28/36 rule to identify low-risk borrowers. This rule states that your principal, interest, taxes, and insurance (PITI) shouldn’t exceed 28% of your gross monthly income. Also, your total monthly debt (PITI, credit cards, auto loans, etc.) shouldn’t exceed 36% of your gross monthly income. If your debt exceeds these percentages, lenders will hold back the amount that they’re willing to lend you.
Boost Your Down Payment
The bigger the investment you make out of your own pocket, the more committed you’ll be to ownership, and the less likely you are to default on your mortgage. So if you can invest more than 20% upfront towards the purchase of your home, it’ll be easier to get a loan.
And as an added benefit, you’ll receive a lower interest rate on your loan, and you won’t be required to pay private mortgage insurance.
What other advice do you have to get approved for a mortgage loan?
This post was included in the Real Estate Investing Carnival during the week of August 2, 2010. Check out the The Income Blog for a variety of great articles!