More than 2.5 million people were turned down for mortgages in 2010, according to the Federal Financial Institutions Examination Council. That's about 23% of all those who are seeking a loan to buy a house.
Compared to just a few years ago, the number is quite low- but it's sure not because lenders are making it easier. It's because fewer Americans feel ready to buy a home.
With statistics like those, it's clear the housing market isn't going to lead the nation out of its economic doldrums, and the numbers are none too encouraging for anyone eying a real estate purchase. Whether you're a first-time home buyer looking to capitalize on historically low interest rates, or a homeowner hoping to upgrade, figuring out how to get a smile out of a lender is task No. 1.
So what do banks want, anyway?
1. Strong Credit
Search Millions of Home Listings
If you have a weak credit score, a history full of late payments, or you owe a hefty chunk of change on credit cards and elsewhere, you're unlikely to get the go-ahead. You can also get harpooned if your credit profile changes in mid-process, says Keith Gumbinger, vice president of HSH.com, a provider of mortgage data. So keep things consistent while your application in under review.
Consistently making only the minimum payments on your debt suggests to lenders that you can't pay the full balance and may be under financial stress, says Dana Dratch, a regular contributor to Bankrate.com. Further, opening a raft of new credit lines in a short period of time is a tell-tell sign that your finances are shaky.
2. Realistic Expectations
You think you can afford to buy, but can you really? And more importantly, can you document that in terms of income and assets?
Many lenders now require 20% down on loans other than those that are FHA-insured, and those carry an additional cost for public mortgage insurance. If they''re willing to lend to you with less than 20% down without that government guarantee, they'll certainly insist on private mortgage insurance, points out Linda Sherry, director of national priorities at Consumer Action.
The lender will do the math, looking at your debt-to-income ratio. Conventional financing limits are typically "28/36," meaning that
no more than 28% of a borrower's income should go towards housing costs, and no more than 36% of income is applied towards all debts, such as mortgage, credit cards, and car and student loans, says Greuling. If a borrower's debt is too high to support a mortgage payment, lenders will typically reject the applicant.
3. Nobody Else's Problems
You wanted to be a good person and help out a loved one, but co-signing on someone else's debt can work against you. "This shows up on your credit report as if were your own debt, and it puts you at risk if the person you co-signed or stops paying, pays late or misses payments," warns Dratch.
How to Get Ready to Apply
Start preparing for your mortgage application well in advance. Pull your credit reports, review them for errors, and if you find any, ask the bureaus to correct them. Get your FICO scores so you know how well you align with pricing incentives or penalties in the market, says Gumbinger.
Save up for a down payment, get your financial accounts in order so that you can produce statements for them on demand, and pay down your outstanding debts more quickly, says Gumbinger. Forget about taking on new debt for a car, or running up a credit card before or during the home loan process, says Greuling. Increasing what you owe can decrease your credit score, and it's a red flag to lenders,
"Even if your credit score isn't great, you should be able to get an FHA-backed loan. In theory, they are available for borrowers with FICOs down to 580 -- but in a practical reality, FICO 620 is the de facto bottom," says Gumbinger. "That said, you'll still need full documentation, at least a 3.5% down payment, and some additional cash for mortgage insurance and reserves."
Says Sherry, "If you have to borrow from family to come up with a down payment, be up front about where you are getting the money from. Don't overstretch the amount you can borrow."
Also, even if you're ready to say adios to your employer, don't switch jobs around the mortgage process, as this too can raise lender's eyebrows.
The bottom line: Be squeaky clean, and make it tough to say no.