How to Make Lenders Compete to Give You Their Money
Banks and private lenders need to set up all sorts of red tape, rules and processes to protect themselves from losing money. As consumer you need to know how to position yourself within those rules in order to qualify for a loan and get accepted.
The purpose of this article is to help you understand the five factors to qualify for a home loan. In other words, these five factors are the most important elements in preparing for acceptance. If you take these five factors seriously you’ll have the highest probability of qualifying for a mortgage and finally own the home of your dreams.
Here are the five factors:
Factor #1: Income-Consistency and History
Lenders want to see you’ve had stable income over the past 2 — 3 years (or more).
Whether you’re an employee, self-employed or an entrepreneur, make sure you prove that your income is stable (or increasing).
Your pay stubs are a good way to show a lender how much money you’ve been earning over the past couple years.
Your tax returns are also a good way to show income-consistency.
You may also consider sending your mortgage officer a detailed spreadsheet of your current expenses too because that shows how your income relates to money going out.
Be as transparent and accurate as you can possibly be with your income statements. The longer you can go back in your history the better. By proving to lenders you’ve had a stable income over the past three years shows them you will be able to have enough funds to make your monthly payments.
Factor #2: Credit Utilization Ratio
Remember this term: “Credit Utilization Ratio.”
Your CUR is the balance on your credit cards compared to your overall credit limit.
30% of your credit score is made based on this ratio.
In an article by Latoya Irby on TheBalance.com entitled What is a Good Credit Utilization Ratio, Irby points out, “Generally, a good credit utilization ratio less than 30%. That means you’re using less than 30% of the total credit available to you. To achieve 30% credit utilization, you should keep your balances below 30% of the credit limit. Anything above 30% can cause your credit score to drop.”
Factor #3: Total Debt Amount
As I mentioned before, lenders want consistent, stable payments over time. If you have too many outstanding debts, those debts could inhibit your ability to pay your home loan. Therefore you won’t qualify. That’s why it’s important to know your DTI (debt-to-income ratio).
Your debt-to-income ratio is your monthly debt divided by your gross monthly income. Lenders use this ratio to measure your capacity to repay borrowed money. The ideal debt-to-income ratio is 43%.
There’s an easy tool over at MortgageCalculator.org you can use online that helps you determine you debt-to-income ratio.
Factor #4: Your Liquid Assets and Net Worth
Your net worth is also an important element that lenders will want to know. Things like bonds, stocks, mutual funds and savings accounts help your lender understand how financially stable you are. They want to know that if something were to happen to your active income you’d still have the ability to continue to pay your mortgage. Also, keep in mind you should have enough money to put down 3 – 20% of the purchasing price.
Factor #5: Your Credit Score
The fifth and final factor in getting the best mortgage for you is your credit score. Credit-reporting bureaus like Equifax, TransUnion and Experian have step-by-step systems to get your credit score. Plus: you can get a FREE copy of your annual credit report.
Once you receive your credit report, the next step is making sure negative entries on your report don’t have any inaccurate data. Most people’s credit reports do contain errors. Those errors could relate to anything in the report. For instance: account number, dates, account status, credit limit, and balance. Look at every single point. If there are any inaccuracies, then write a dispute letter that outlines everything you’ve discovered. You send that letter to the credit agencies, requesting them to remove the entry. There are a few other ways to repair negative items on your credit report too.
You can negotiate for “Pay for Delete,” which is basically getting your creditors to accept a payment in exchange for removing negative items. With that option, make sure you do it through mail (not phone).
The last option is investing in a professional service that will remove negative entries for you. The better you position yourself with those five factors, the more favourable you are to potential lenders.
These credit reporting agencies are the top three to pull your credit report:
I highly recommend you become ruthless about your credit score. Be aware of it and set up a monthly routine to improve it. Please head over to one of those credit bureau websites and get a copy of your credit report now.
I can’t stress enough how important the five factors are to getting approved for a home loan. Again, the five factors are: Income-Consistency and History, Credit Utilization Ratio, Total Debt Amount, Liquid Assets and Net Worth, and Credit Score.
If you would like assistance in getting approved for a mortgage, head over to the CONTACT page and sign up for a free, 30-minute consultation.