Techniques for Getting a Home Loan

As brokers, bankers and realtors, we know that you work with more than real estate investors, so we wanted to share some helpful tips for you and your homebuyers.  Below are home loan tips including credit, employment and income, and how to overcome certain denial reasons to get approved.

  • Credit Score – It all starts with credit.   Before beginning the loan application process check credit.  Credit reports can be checked for free once a year from each of the three main credit bureaus, but they will not give credit scores.   If a credit score is lower than the lender’s requirement, sometimes lenders will ask for extra money down and/or money in reserves, in order to offer a home loan.  When home loan shopping, a 620+ credit score qualifies for most loan products.  Credit scores between 580 and 619 still qualify under FHA, VA and USDA loans, but won’t at Fannie Mae.  FHA allows down to 550 credit scores with 10% or more for a down payment.
  • Income – Lenders want to see steady income in order to show reserves for loan payments.  Unstable income is a valid reason for lenders to deny the application.  If there is a complicated form of income, be prepared to provide income explanation documents in addition to the last two years of taxes with all schedules.
  • New Job – Lenders want to see consistency in employment for stability.  If a new job was started within the past two years of the application date, new and former employers may need to confirm employment and salary in writing for the lender.  If a new course of study was undertaken during the prior two years before starting a job, such as an RN, then some lenders consider the current income even if new to the job.
  • Payments – Late payments can lower credit scores.  Getting in the habit of paying bills on time will help restore and keep good credit.  It may help to take the time to explain late payment situations to lenders, especially those reported that should not count on the report, such as late car payments after trading in the car to a dealership.  A credit report should not illustrate any late payment patterns.  Under the Fair Credit Reporting Act, creditors are required to correct erroneous credit reporting when a dispute is filed in writing.
  • Debt-to-Income Ratio – If spending habits do not leave much room for savings, then lenders may reject the application as they are worried there will not be enough money to make loan payments.   As of January 10, 2014 the Dodd-Frank Act requires the debt-to-income ratio to be less than or equal to 43%.
  • Down Payments – Most loans will require borrowers to make a down payment on the home.  When some people cannot afford this, gift money can help.  In 2013, 27% of first-time buyers used gift money to purchase their first home.  Gift money is not a loan, but is money gifted by family and/or friends to be used towards down payments and closing costs.  You will need documentation stating the purpose of the gift, the transaction, and the source of funds.

It is easy to obtain a good real estate loan, as long as you show good credit, on time payments, stable income and employment, and a reasonable debt-to-income ratio.

Have your clients experienced any minor bumps while obtaining a home loan? If so, how did you surpass the obstacle?