You Can Still Become a Homeowner Despite the Housing Market Crash

There’s no doubt that the housing market crash has changed the mortgage lending industry. Today’s prospective homebuyers are finding a very different world than those of just a few years ago. You can no longer purchase a house with a zero down payment. On top of that, lenders are requiring higher credit scores, and higher cash reserves. And if you do score that loan, you’ll be paying higher mortgage insurance and higher fees to Fannie Mae and Freddie Mac. As a result, mortgage loans are at an all-time low.

Sounds bleak, doesn’t it? The truth of the matter is that you can make the housing market crash work for you. The key is to maintain good financial standing and to be prepared when you ask for that loan.

Consider the key elements to obtaining approval on your mortgage loan: capacity, credit, collateral and capital. You’ll need to have all these bases covered to ensure that your loan is approved.

Getting Your Loan Approved
Capacity involves your monthly income and expenditures. A lender will look at how much money you make, your monthly obligations — such as auto and student loans and credit card payments, and whether your income to expenditures will allow you to make the monthly mortgage payment. While looking at these things, your lender will also look at whether your income is consistent as well as how long you’ve been at your current job. The lender will also request paystubs, W2 forms, tax returns and employment contracts.

Your credit history is an important part of the mortgage loan process. Credit history is based on your credit score; your payment history and missed payments; bankruptcies, garnishments and other public records; and your credit report. If you’ve missed payments on another loan or have been late paying bills, then you’ll need to rectify this situation before applying for a mortgage loan. If you’ve filed bankruptcy, you’ll need to wait two years until you’ll qualify for a mortgage loan. And if garnishments, child support, alimony, or another judgment against you reduces your monthly income to an amount that the lender suspects will make it impossible to make your mortgage payment, you’ll be denied the loan.

As for your credit score, you can order it for a nominal charge from any of the three credit reporting agencies, Experian, Transunion or Equifax. You can visit http://www.annualcreditreport.com to get your credit report from all three agencies for no charge once a year. At the links you will follow to get your credit report, you can order your credit score. You can order it from all three, and it might vary by a few points among the three agencies, but you can also just order it from one agency.

Your credit score is based on your payment history, your credit history, any new credit obtained, amounts owed on loans and credit cards, and the types of credit you have. To prepare for buying a house, cancel any credit cards you don’t use, and request a letter of account closure from the creditor to ensure the account is actually closed. You’ll also want to pay down credit cards and loans as much as feasible, and don’t apply for any new credit cards or loans within a few months of applying for your mortgage loan.

As for your payment history, you’ll need a solid record of on-time payments with no missed or late payments. Your credit reports from Experian, Transunion and Equifax will contain a list of all your current accounts and a month-by-month payment history. If you’re unsure as to whether you had missed or late payments, you should definitely check your credit report before the lender does. If there are errors on your credit report, resolve these with the all three reporting agencies before you apply for your mortgage loan. If you resolve the issue with only one agency, the other two will still have the problems on their records — and your credit report.

The third factor in obtaining approval for a mortgage loan is collateral. This is determined by the property’s value and condition. Before the loan is approved, an appraiser will visit the property and determine its value. If the property is worth more than the mortgage loan, that’s good. If the property is worth less than the mortgage loan, your loan won’t be approved, and you’ll have to either walk away from the house or renegotiate the price with the seller.

The final factor in obtaining a mortgage loan is capital. How much do you have in cash and liquid assets (stocks, bonds, CDs, retirement accounts)? You’ll need to have enough cash for the down payment and closing costs. Be prepared to provide copies of all your account statements to prove to the lender your cash and liquid assets.

When Mortgage Loans Are Denied
Mortgage loans are denied for a variety of reasons, many of which I’ve already discussed. You can also ensure that your loan will be declined if you increase your credit card debt before the loan is approved. Don’t go out and charge new furniture and all the things you’ll need to set up house on your credit cards while you’re waiting for your loan to be approved. These charges will show up on your credit report. Likewise, don’t take out any other loans during this period. The new car will just have to wait.

Switching jobs while going through the process of buying a house is a very bad idea. In today’s economic times, this is sometimes out of your control if you’re the victim of layoff or downsizing. In these cases, it might be a better idea to hold off on buying a house until you find a new job and recover financially from any period of unemployment. If you are searching for a job and plan to leave your current job voluntarily, wait until after your closing date.

Another way to assure that your mortgage loan will be denied is to keep pertinent information secret during the application process. Make sure that you answer all of the lender’s questions, and answer them honestly.

As you’re considering buying a home, keep this information handy. And remember, take good care of your credit now and always.