After our real estate bubble, even home buyers with good steady incomes and good credit scores may not be able to get guaranteed approval mortgage loans to buy houses. The US mortgage industry has been totally changed within this two years. However, this is for the better as seen from the stricter standards imposed on big companies such as Fannie Mae, Freddie Mac and larger banks that buy mortgage loans from smaller lenders.
If you are currently in the market to buy or refinance your home, there are a few things to take note of in order to increase your chance of ensuring that mortgage loan is approved successfully despite having bad credit.
If you are looking to buy an older house from foreclosure listings, you may think that you can get a dirt cheap price for these per-owned properties, especially those in fixer-upper conditions. However, many are in need of repairs and home improvement works which means they will fare badly in the market valuation by the real estate appraisers.
If you choose a house that is in run down condition, it will not easy to find a bad credit mortgage lender willing to lend you the money to purchase it. Loan approvals will be easier for second hand homes in ready to move-in conditions.
Remember to check with your lender how long it takes to review your mortgage application. The mortgage rates are rising with each passing day and you will not want to wait too long for approval. Approach another home loan company that can offer faster guaranteed approval and monitor the progress.
Lenders generally will not approve mortgages for homes with broken windows, roof leaks and serious flood or fire damage because there is a possibility they will be the one to repossess such run down fixer-upper properties in case the borrower defaults.
On the other hand, sellers of such houses have probably met up with a lot of interested buyers that just could not close the sale because they were rejected by the mortgage lenders. Some will insist the home buyers to pay cash instead before they are willing to enter talks for bargaining over the sale price.
Note that even if your first house appraisal by the lender is consistent with the price you have agreed upon with the seller, you still need to clear a second review appraisal done by the banks and investment companies that buy over home loans from your lender.
Appraisals are tougher to manipulate these days by just comparing there are similar home sales that are priced better compared to the ones used by the appraiser. You have to be prepared to go to for more price negotiations with your house seller or get ready more money to pay the shortfall between the appraised house value and the asking price set by the seller.
Reduce your debt to income load for easy mortgage approval
Besides checking your credit score, home loan lenders are now also concerned over how much percentage of your pay check goes into paying for overall housing expenses (if they approved the mortgage) and how much do you currently spend on paying your other loans and debt commitments such as credit car bills, car loans etc. Note that these housing expenses include the monthly mortgage payments, property taxes and private mortgage insurance where applicable.
Previously during the property bubble, you can still get a mortgage even if your overall debt to income ratio (DTI) is at 65%, which is alarmingly high risk since it is very difficult to stay current on all loan payments if such a big porting of your income is taken up by your creditors. Now, most lenders adopt an upper limit of 33% to 36% DTI and will reject your mortgage application directly if you have too high a debt load. While your credit score considers more of your previous financial activities and responsibilities, the DTI ratio reflects more of your current and short to mid term debt obligations.
Although this DTI mortgage requirement does not consider your absolute income level, it is still a good measure because most people enjoy a lifestyle commensurate with their income. Even if you are earning a high income, taking on a mortgage with a projected housing and debt ratio of 40% and more is still dangerous and potentially damaging to your personal finances especially if you have bad credit lower than 580.
If you have the surplus cash, you are better off paying down your current credit card debts and toxic loans with high interest rates to improve your finances and credit score first. At above 30% debt ratio, most financial advisers would consider this as living above your means unless the situation is caused by family or medical circumstances out of your control.
Mortgage loans for self-employed home buyers
If you are self employed, it can be more tedious to clear the stable income requirements set by mortgage lenders to approve your loans. As you are required to submit your tax returns over the past two years and your most recent income has decreased due to the economy compared to the earlier year, the lenders will still use the lower income year to decide whether your loan amount can be approved.
Compared to those that are regular employees, the mortgage industry is more strict on the irregular income of the business owners, self-employed or freelancers. If your income shows a lot of fluctuations even though the year to year average is still respectable, some mortgage lenders will still avoid lending you the money to buy a house as they are worried about the volatility of your earnings and that self employed buyers are more likely to default on their mortgages.
This applies to those in sales careers where the primary component of your pay check is from variable commissions. Many companies are now switching to performance based renumeration in order to weed out unproductive workers and drive more sales. This can also affect the success rate of your mortgage loan because lenders may not necessary take your recent commission income into consideration unless it is steady for at least two years.
You may need to use your spouse’s pay stubs and tax returns to qualify for home loans if your real estate broker suggest that your irregular income can pose a risk for the lenders.
Pay more mortgage down payment or buy private mortgage insurance
If you are buying a house with less than 20% down payment, you will need to get pre-approved private mortgage insurance (PMI). However, these PMI providers are also getting stricter in screening bad credit home buyers ever since the real estate slump.
If you have good credit above 720, your current debt to income load is well below 30% of your income and you have a fat savings bank account at least 6 months’ of your debt payments — it will be easy to buy private mortgage insurance and borrow up to 95% of the home purchase price depending on the performance of the local property market. For example, with Florida’s worsening real estate industry, you may only be able to borrow up to 85% home loans even with perfect credit. If you have poor credit between 580 to 720, expect to pay more down payment in order to guarantee your mortgage application to be approved