Overcoming Qualifying Hurdles
For many
potential borrowers and future home owners, preparing to apply for a
loan makes all of the difference in the world. Not only knowing what a
lender expects but staying one step ahead of the game will insure
success.
In the previous
section we discussed what a lender expects before approving a loan. In
this section, we will focus on the three areas that often cause problems
for a borrower: income, credit, and the source of funds to close.
Income
As a standard rule of thumb, most lending guidelines require a two
year history in a profession and proof of income at the current pay
rate. If you know that in a month or two you will receive a pay raise,
wait until the new pay scale goes into effect. Even a 25 cent raise per
hour will increase your loan amount by approximately $6,000 (assuming an
8% interest rate over 30 years).
If you are
self-employed, you may have to bite the bullet and not write off as many
expenses as you could. By doing so, the amount of reported income
increases which results in a higher qualifying loan amount. On the
other hand, you pay more taxes and completely ignores other available
loan programs such as a stated income or no income verification loan.
If you currently
have a temp job and you know a lender will not accept your income, find
a permanent position with an employer. Unless you are drastically
switching professions (Marketing Executive to Chemist, for example), it
likely that you will be able to use the income to qualify.
Credit
Before searching for a home or attempting to apply for a loan, it is
highly recommended that you request a copy of your credit report from
all three major credit repositories (Experian, Trans-Union, and
Equifax). Review the information to see if any known or unknown
problems exists that could potentially prevent you from obtaining a
loan.
If you suspect
that you may have credit issues (i.e. recent late payments, open
collection accounts, judgments, etc) that report on your credit report,
take care of them immediately. If you decide to pay off a collection
account, try negotiating with the creditor first. Often times creditors
will accept a reduced amount in order to be paid (something is better
than nothing). However, if you pay off an account, be sure to have
documented proof from the creditor that the account is paid in full.
If you plan on
paying off several credit cards prior to borrowing money, be sure to pay
off the account(s) at least one to two months prior to application. The
reason is due to the slow response time of many creditors in showing
that an account is paid off on your credit report. If a lender cannot
prove that you have paid off an account on your credit report, that debt
may be included in your debt to income ratio (thus reducing the amount
of the loan you qualify for).
Source of
Funds
Another sticky issue that many borrowers have to dance around is
verification of their money in order to close. Lenders generally
require that money rests in a bank account for a minimum of three months
in the bank.
If you know you
will be searching for a home soon, put the money in the bank and let it
sit there for at least three months. If the funds will be coming from
an acceptable source such as the sale of an asset, be sure to document
the transaction by a bill of sale, a copy of the check, and a copy of
the deposit slip. Furthermore, when depositing the money into your
account, DO NOT take cash back or deposit other items with the money
into your account. You want your bank statement to reflect the exact
dollar amount from the transaction. For example, you sell your car for
$2,000.00 and you make copies of all of the paperwork, your deposit slip
should only read $2,000.00. Nothing more and nothing less. If you need
to make an additional deposit, do it on another deposit slip.
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