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Understanding The Tougher Mortgage Guidelines And How To Help Get Your Loan Approved

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

Stronger Mortgage Loan Guidelines

The biggest change in mortgage qualifications is how the mortgage companies calculate income. For self employed consumers, this can be extremely tough. Basically, lenders are now using the income reported to the IRS as taxable income as the income to qualify for the mortgage. If you write 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 loan 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 reduced.

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

Credit Score Requirements

Credit score requirements have also changed for mortgage loan approvals. several mortgage lenders now require at least a 620 credit score for loan 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 mortgage loan approval. Cash reserves are the amount of funds needed after the loan closes. Several programs require at least 6 months reserves based on the new mortgage payment. For example, if your mortgage payment is $1000, the lender could require $6000 in reserves.

Increase Your Chances For Mortgage Approval

With the tighter credit guidelines, there are some important steps you can take to assist with the loan approval. First step is to have the highest credit score possible. Lower credit card balances is one of the easiest ways to improve your credit score, since credit card debt has an immediate impact on your score. Check your credit report on a regular basis for any mistakes on the report. 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 $50000 a year but write off $5000 in expenses, your actual yearly income is only $45000. When applying for a mortgage, 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.