5 Tips to Help you Qualify for a Loan in Today's Economic Climate

If you have a weak credit score, a history full of late payments or you owe a significant amount on credit cards and elsewhere, you're unlikely to get a green light for a mortgage. You can also be denied if your credit profile changes in mid-process of submitting your application for a mortgage loan. Other conditions to recognize as obstacles to securing a mortgage loan include consistently making only the minimum payments on your debt and opening  a number of new credit lines in a short period of time.

Here are 5 basic tips to help you get your financial house in order when shopping for a new home: 

1. Get rid of as much debt as possible before starting the mortgage application process. You need an established payment history to get approved for a mortgage and the best interest rates. If you have a recent late payment - or you've just paid off some delinquencies, allow at least six months before starting to apply for a loan. 
2. Reduce your overall debt-to-income (DTI)  ratio and improve your credit score. Lenders typically look for a borrower’s total monthly expenses to not exceed 28% of their monthly gross income. Ideally, your monthly debt payments should be at most 12% of your income – the lower, the better. After obtaining  a mortgage, of course, your DTI ratio climbs significantly, but shouldn't be higher than 43% of your income.
3. Clean up your credit. First, find out your credit score. Obtain a report from each of the three credit bureaus and carefully review them for  all negative items. Address any and all inaccurate or old notations. Your score needs to be a minimum of 680 -- preferably 720 or higher -- to qualify for a lower interest rate on a mortgage.
4. Hold off on large credit purchases, and don't apply for any new credit until you close. Lenders check credit reports at the time you apply and then again right before closing. 
5. Get your paperwork together. A lender will want to see pay stubs, bank statements, assets, credit documents, income tax returns, all financial statements. How far back should you go? Expect to show the last five years, and possibly more. Whatever you provide the lender, be sure to make copies to retain for your own files.

Home mortgage loan rates are relatively low historically, but today, lenders have high expectations for those to whom they will loan money. Gone are the zero-down home loans of the previous decade. Obtaining an affordable mortgage requires, in today's environment, more work than ever on the part of the borrower. But the result of a new home at a great mortgage rate is worth the effort.