Getting a Home Loan?
September 21, 2009
For many people these days, it seems as if getting a home loan is just as likely as my hometown Mets winning next year’s World Series. But as disastrous as this season has been, there is hope and with a little help on how to improve the odds on getting a loan, the same can be said about your clients actually securing one in today’s challenging marketplace.
Check Yourself Out
To begin with, if your clients are thinking about buying a house, they should begin by checking their credit report. After all, to get a loan these days, a good credit score is more important than ever before.
Your clients may be reluctant to check their report under the belief that making an inquiry will hurt their score. In this scenario, however, it just isn’t the case. Merely checking their credit is technically known as a “soft inquiry,” and these types of inquiries won’t affect one’s score. That said, it’s always a good idea to double check this with the company providing the report before actually executing the request. On the other hand, a “hard inquiry” does affect one’s score. To be clear, a “hard inquiry” takes place when someone actually applies for a loan and in this scenario, they’re obviously not doing such a thing.
While checking your credit report may seem like an obvious first step, I’ve found it’s often neglected. Some people apply for a loan, only to later find out there’s something on their report that could’ve easily been cleaned up before actually applying for it.
To get a free report, have your clients visit annualcreditreport.com or by call them at 877-322-8228. Although the reports are free, getting their actual score isn’t, which is fine considering all your clients are really doing at this point is checking the reports for errors and/or delinquent debt.
If errors are found, your client will need to contact the respective agency to clear up the mistake. Before making the call, have your client not only prepare their case but also grab a copy of War and Peace and run to Costco to stock up the fridge. Unfortunately, I hear wait times to speak to someone at the “big three” agencies (Equifax, Experian and TransUnion) can be quite excessive. Keep in mind: Agency reports can differ from one another, so if your client wants to do a thorough job, they should request a report from each of the big agencies, hence, the potential need for lengthy novels and an abundance of family-sized Pringles.
For help in what could be a tedious process, there are various third-party companies that can be hired to potentially correct the errors and clean up some credit. Unfortunately, some of these firms charge exorbitant fees and there are a few stories about companies out there that didn’t do much after a fee was collected. This isn’t to say such a road shouldn’t be traveled, but make sure your clients check the firm out before actually hiring them.
Recently, I’ve met several people who found errors and/or paid-off delinquencies before applying for their loan. Thanks to first checking their report, they were able to clean things up and give themselves a far better chance to actually secure one.
Lastly, if a delinquency is cleared up or an error is found, it usually takes between 60 days and 90 days for the correction to be reflected in the report. But keep in mind it will take significant follow-through to see the process through towards its hopeful completion.
Improve Your Ratio
Another way of improving the chances of getting a loan is to do something known as “improving the ratio,” which could easily wind up being the make-it-or-break-it difference between actually getting one or not.
These days, if your client applies for a conventional mortgage, the total long-term debt (housing expenses plus debts that won’t be paid off within a year) should be no more than 36 percent of their gross monthly income. If the ratio is higher than this amount, your client can pay down their debt in order to reduce the ratio and thereby increase the chances of actually getting a loan.
If paying down debt cannot be done, another way of improving your client’s ratio is to consider attaching a non-occupant as a co-borrower. In most cases, the non-occupant needs to be a relative and has to qualify with good credit.
Although third on my list, this one likely belongs on the very top. In some cases, people with good credit get a new job and then apply for a loan. Ironically, given today’s stringent underwriting environment where lenders have an insatiable appetite for a history of stable income, changing jobs can easily hurt you even if you’re making more money at the new firm. So if you are changing things up, it could very well be in your best interest to first get a loan and then change jobs.
SPEAK TO FANNIE
Is your client looking to re-finance their property? Don’t forget to check out Fannie.
Thanks to the current administration, Fannie Mae’s “Re Fi Plus” loan program can be a major benefit. Re-Fi Plus loans are available to those with loan-to-value ratios of up to 125 percent. Furthermore:
Details on these plans are a bit lengthy so for more information, be sure your clients visit FannieMae.com.
Save Some Money
The final way your clients can improve their chances to get a loan is the most obvious but often the most challenging: save more money to increase the down payment.
Depending on your client’s situation, they should put down at least 20 percent of their home’s purchase price, especially since putting down these higher amounts will avoid having to carry costly Private Mortgage Insurance (the general exception being getting a loan through the Federal Housing Administration (FHA) whereby the down payment can be as low as 3.5% of the purchase price). Keep in mind: If your client has to carry PMI, the lender is obligated to cancel the policy once they have accumulated 22 percent of equity in the house — something to keep in mind and periodically check as payments are made over time.
There’s no doubt this is a challenging environment to secure a loan. Earlier this year, I went through a re-fi myself and was amazed at how much more difficult the process has become since I went through it years ago.
Whether it’s your client, friend or family who is looking to get a home loan, following the above steps can potentially improve their chances of securing one. If you have any ideas I haven’t covered, I’d certainly appreciate hearing your thoughts, and of equal importance, if you’ve had any recent premonitions on how my hometown Mets will perform next year, I’d certainly welcome hearing those as well.
Alan Haft is an investment advisor and author of three books.