Home-shoppers might be forgiven for being nostalgic for the boom years, when credit flowed like water and anyone with a pulse could qualify for a home loan. These days, lenders have swung to the other extreme, denying credit to all but the very safest applicants. That's caused many people to shy away from applying. For the last two weeks of December, loan applications fell by 22 percent from the previous week, even after adjusting for the holidays, according to The Mortgage Bankers Association's recently released weekly Mortgage Applications Survey
So how do beat the odds and snag a home loan? The ideal loan applicant is a "triple threat" -- meaning they have excellent credit rating, large down payment, and low debt to income ratio-with steady significant income. But even if you don't have the loan equivalent of a trifecta, you don't have to rule out future home ownership. Even those with a foreclosure or bankruptcy under their belt, or who have previously been turned down
for a loan, can get funding. There are hurdles, for sure. But read on for Housingwatch's
tips for overcoming the road blocks and getting a mortgage in today's economy.
You've heard the standard advice
about having a great credit score and pay your bills on time. But for those with less than stellar records, you need to highlight your "compensating factors" -- those mitigating factors not reflected in your credit score or on your credit report
"The idea behind using compensating factors is a consumer is trying to look more attractive on paper to a bank," says The Money Coach
Lynnette Khalfani-Cox, author of "Your First Home: The Smart Way To Get It And Keep It."
It's sort of like a job interview. Although your resume may list the facts of your job history, the face-to-face interview is where you show a potential employer your character.
In today's electronic world, of course, there are few face-to-faces or opportunities for personal appeals, such as explaining why that bill was paid late. But you can still try to present yourself in the best possible light. "One of the things people can do to tip the scales in their favor is to put their compensating factors in a bullet list and submit it to the lender or broker," suggests Khalfani-Cox. It just may help tip the scales in your favor when you're not a triple threat.
Here are 7 compensating factors to consider submitting with your loan application to help improve your chances for obtaining a mortgage.
1. Flaunt other assets.
If you don't have a large cash reserve or a large down payment, show loan officers what other financial assets you do have. For example, if you have whole life insurance, list the cash value on your loan application, Khalfani-Cox told HousingWatch.com
in a phone interview. If you have a sizable 401(k) or other retirement accounts, be sure to list them all and their current value. This strategy lets lenders know that if you're ever in a bind paying your mortgage, you might just pull from one of these other sources to make ends meet. And if you're seeking to refinance, showing a low loan-to-value rating is a huge plus.
2. Stress job stability.
If you have been working in the same industry for several years, and even with the same company for, say, five years or longer, be sure to highlight this fact. And don't forget to mention any regular pay raises you have received. If you have a cost of living increase every two years or an annual merit pay increase, be sure to mention in your loan application that, say, your pay has increased 4 percent every year for the past 5 years. The same goes for regular bonuses. Proof of rising pay or additional money will only help lenders know that you will have funds to offset any possible rise in your property taxes or utilities.
3. Show discipline.
Prove to the lenders that you know how to save. If you've been socking away $600 a month to a savings account, or have been contributing regularly to a retirement account over the years, this will help you. "You are trying to show discipline, consistency and stability," says Khalfani-Cox.
4. Willingness to stay put.
Prove to lenders that you're not a flight risk. Lenders like to believe that you're going to stay put in that home for some time to come (though you know you can always upgrade or downsize). Show that you're wedded to the home, neighborhood or greater community by listing how long you resided at your last residence if the time was significant -- say, three, five or seven years. If that time was spent living in your mother's basement, that might not fly as well, unless you show that the home you're interested in is down the street from Mom. Strong ties to the community can help.
5. Increase your down payment.
The days of zero down payment are pretty much gone. Yes, you can get a house with a 10 percent down payment, or 3.5 percent under FHA. But in general, the larger the down payment, the quicker the loan approval. "The single largest obstacle historically has been amassing enough money for the down payment and closing costs," says Khalfani-Cox. "If people want a $200,000 home with a 5% down payment, that is coming up with $10k and closing costs. Don't believe you have to come up with that money on your own." There are a few down payment assistance and state and local municipality programs to help. Check with your city about any home buyer assistance; show your banker you're not afraid to ask for help and that you have tenacity for solving your own financial problems.
6. Don't bite off more than you can chew.
Be reasonable about the amount of house you can afford, even if some real estate agents or brokers are telling you you can afford more. "You don't want to get in over your head where you're close to being in a negative equity situation if values drop," says Khalfani-Cox. That is sure to send a red flag to lenders - especially these days. The best advice is to start out smaller than you want. Spend some time getting to know home prices in the area in which you want to buy and know that you can always move up later. It's far better to be a homeowner in a home you can afford than to move into something outside your payment comfort level only to lose it down the road.
7. Backup with proof.
It's one thing to tell potential lenders that you were never late on your rent, or that you always pay your child support obligations. It's another thing to be able to show them. Be prepared to give documentation to back up all of the items on your compensating factors list. For example, show canceled checks for payments you've made to any entity, show bank statements to prove regular deposits of income or contributions to retirement. A letter from your mom or landlord saying you paid rent on time is not enough. If you cannot produce these documents, you will raise doubts about the veracity of your payment history. "Know there are certain red flags that give lenders pause. Avoid those red flags on your application," advises Khalfani-Cox.