How To Help With Your Loan Approval With The Current Mortgage Guidelines | Mortgage

How To Help With Your Loan Approval With The Current Mortgage Guidelines

Several people believe that getting approved for a mortgage is very difficult and many believe they cannot get loan approval at all. Unfortunately, some of the information about loan approvals is true. Many mortgage companies now have tighter underwriting guidelines, but understanding how mortgage approvals operate now can help you better prepare yourself for the mortgage process.

by DavidGWhite

Several consumers believe that getting qualified for a mortgage is very difficult and several believe they cannot get loan approval at all. Unfortunately, some of the information about mortgage qualifications is true. Several mortgage companies now have stronger guidelines, but understanding how mortgage loan approvals work now can help you better prepare yourself for the mortgage process.

Tougher Mortgage Guidelines

The biggest change in loan qualifications is how the mortgage companies calculate income. For self employed borrowers, this can be very tough. Basically, lenders are now using the income reported to the IRS as taxable income as the income to qualify for the loan. If you take off a lot of deductions on your IRS 1040, then you might have a harder time qualifying for a mortgage loan.

Debt-To-Income

Another factor in the mortgage approval is the debt-to-income (DTI) ratio. This ratio is based on the amount of debt compared to the monthly income including the new house payment. If your DTI is over 50 percent, the chances of the loan getting approved is lower.

Some programs like FHA home loans allow for a higher DTI ratio and have some flexible underwriting guidelines. This is why many first time home buyers decide to use the FHA mortgage program. FHA mortgage loans have lower credit score requirements, require a lower down payment and have higher DTI ratio requirements.

Credit Score Requirements

Credit score requirements have also changed for mortgage approvals. Most mortgage companies now require at least a 620 credit score for mortgage approval. Some programs like conventional loans will require a higher credit score depending on the amount of the down payment. If you are planning on a down payment less than 20 percent, expect to need a credit score at least over 680. This is due to the private mortgage insurance requirements and PMI requires credit scores over 680.

Cash Reserves

Several mortgage programs now require cash reserves for loan approval. Cash reserves are the amount of money needed after the mortgage closes. Many programs require at least 6 months reserves based on the new mortgage payment. For example, if your mortgage payment is $1000, the mortgage company could require $6000 in reserves.

Better Your Chances For Loan Approval

With the stronger credit guidelines, there are some crucial steps you can take to assist with the loan approval. First step is to have the highest credit score possible. Reducing credit card debt is one of the easiest ways to increase your credit score, since credit card debt has an immediate impact on your score. Check your credit report on a regular basis for any inaccurate information. Work with a credit repair company to remove any inaccurate information.

Save Your Money

Save your money and place your funds into a savings account. Keep in mind that you want to save for the down payment and have some money left over for any cash reserve requirements. Cash around the house cannot be used as a verifiable source of funds. Lenders require all funds to be verified prior to loan approval.

Use Correct Income Information

Make sure that you are using income reported to the IRS as your monthly income. If you make $70000 a year but write off $10000 in expenses, your actual yearly income is only $60000. When qualifying for a mortgage loan, use the correct income so that you are approved on the correct information. Using inaccurate information could affect the approval of the loan later in the process.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

David White is a Sr. Mortgage Advisor who specializes in Dallas home loans. David has over 12 years experience in the mortgage industry and understands home mortgage loans.