With today’s changing mortgage market, lending requirements have gotten stricter. Bottom line, for those with less-than-perfect credit, it’s harder to get a loan now than it was a year or two ago. Here are some things you can do to improve your attractiveness to mortgage companies and be a smart shopper.
Improve your credit score
Six months or so before you’d like to buy a house, check your credit score. Go to www.annualcreditreport.com and pay the small fee to get your score, along with your free report. If your score is below 700, you may want to improve it before applying for a loan. Check for errors; make your loan and credit card payments on time, every time; pay down your credit cards, but don’t close them.
Increase the size of your down payment
A down payment of at least 10 percent makes you a more attractive borrower to lenders because the lender assumes less risk if you default on the loan. When you’re figuring out what price home you can afford, be sure to take into account how much you can afford to put down.
Lower your debt-to-income ratio
This refers to the percentage of your gross income you spend on housing and recurring debt. Lenders use this calculation to determine your risk. In general, lenders consider borrowers with more than 36 percent of their income going towards housing and recurring debt to be a higher lending risk.
A good idea at any time, comparison shopping is particularly useful in a tighter mortgage market. Lenders’ policies and lending guidelines are all different, so you may be able to get better terms and pricing simply by talking to more than one lender.
Include a loan contingency in your offer contract
A loan contingency simply states that your offer to buy the house depends on your ability to obtain financing. In a hot housing market, home buyers will sometimes not include that contingency in order to make their offers more attractive to sellers. It can be a good idea to give yourself an out, just in case your financing falls through.