Looking to get a home loan? The economy has gotten much better over the past couple of years but many banks are still suffering from PMCSD (Post Mortgage Crisis Stress Disorder) and are very conservative about the home loans they’re willing to make. They have seen the results of loose lending practices that ended in millions of foreclosures and billions lost in real estate. They now know to stay away from risky borrowers. However, the more you can show that you would be a very low risk of defaulting, the more likely it is that you will be able to get a great hime loan even if your credit score is mediocre. Beyond this, here are five tips that could help you improve the odds for getting a bigger mortgage.
Pay down a few of your bills
If you pay down some of your credit card balances this could boost your credit score – depending, of course, on how much debt you have. In addition, when you pay down some of your debts this will improve your debt-to-credit ratio, which should allow you to get a larger mortgage. Make no mistake about this. If you want to pay off debt, you will need to have a strategy. This is where you might want to involve your mortgage professional in the conversation. He or she should be able to tell you which bills, and reduced by how much, will have the biggest impact on your score.
Do an audit
If you know you have good credit all you need to do is call your bank, submit a loan application, and start shopping for a house. But if your score is in the neighborhood of 700, you might want to do a quick audit of your credit reports. Getting just a single error or a damaging item deleted from a credit report, might add as many as 10 points to your credit score. And that might save you as much as one quarter of a point on your interest rate. You can get your three credit reports free on the site www.annualcreditreport.com. Review them carefully looking for accounts that aren’t yours or damaging items that should have “aged off” your report by now. If you’re in a real hurry you can ask your bank or mortgage company to send what’s called a “rapid rescore” request to the appropriate credit bureau. If you can get documentation proving your case from a creditor and have it submitted by your mortgage broker or bank the damaging information could be deleted in a week or less.
Spread it around
The way credit scores work is to document if you’ve been active and smart in the way you’ve used credit. For example, the algorithms used in score-setting target a credit utilization ratio of 30% as ideal. This means you should have a balance of no more than 30% on any one credit card and also maintain a usage of 30% of your total available credit. This is called your debt-to-credit ratio and you can calculate it by dividing the total amount of credit you have available into the amount you’ve used. If you have $20,000 in total credit available and have used $8000 of it, your debt-to-credit ratio would be 40% and that’s something you would need to work on. You might also need to spread your credit card debt around on several cards so that as many of them as possible have a 30% balance — or even less.
Ask for a gift
Unless you’re a veteran or a special case, your bank will require a down payment on your home loan. You might be able to use your savings for yours so long as you could put down the bank’s 3.5% bare minimum. But if you want to get the best interest rate you need to put down a full 20% down payment on your home loan. Do you have a relative that might be willing to help out? Then this would be the perfect gift. Most lenders will allow gift money as part of your down payment but only if you can get a “gift letter” from your relative confirming your relationship and the fact that the money is not a loan but a gift.
Tap your 401(k) or IRA
If you have a traditional IRA, you are allowed by law to take out up to $10,000 to use as a down payment on your first home without being hit with a penalty though the money will be taxed as regular income. If you have a Roth IRA, you can withdraw as much as you wish without it being taxed. Your 401(k) is somewhat different. Some of the companies that provide these accounts will permit you to borrow from yours and then repay the money over some period of time and with interest.
It just makes better sense if you can borrow from yourself instead of a lender. This is especially true if you can borrow enough from yourself to get up to the magic 20% down payment on your home loan as this will get you a lower interest rate on the entire balance of your mortgage and will save you literally thousands of dollars over the life of the loan.