Look Like a Better Credit Risk to Potential Mortgage Lenders

While home ownership is a dream for many Americans, the bank failures and bailouts that the economy has experienced in recent months have caused lenders to change their lending habits. Banks that once would have approved a no asset no income mortgage, or even a jumbo mortgage, are now requiring their borrowers to prove their credit worthiness in the form of proof of employment and a high credit score. Gone are also the teaser mortgages that drew the borrower in with the promise of a low interest rate that would drastically increase in a matter of three to five years. Combine this with an unstable economy and banks are now more concerned than ever about lending money to the wrong person. If you find yourself longing for home ownership, here are some simple tips that can help you improve your credit rating so you look like a better risk to potential lenders.

Avoid taking on additional debt

One of the biggest red flags to lenders is your ratio of available credit to utilized credit. If you percentage of utilized credit is too high, it can actually hurt your chances of qualifying for a loan. Even if you have never missed a payment and have never gone over your credit limit, a high ratio tells banks that you possibly have a hard time managing the credit you have been allotted. You should aim for a percentage of use of no more than 35% of total credit limit. Banks want to see you can handle any allocation of credit that you have been given. It’s ok if you carry a balance on your card; just make sure you do not surpass a certain percentage of credit use on any of your cards. Pay off any outstanding payday loans in full so that they don’t impact your credit rating, and make sure that at least your recent credit history is golden.

Evaluate your finances

All your debt, including your mortgage, should not exceed 30% of your total annual income. This includes all credit card payments, as well as how much you feel you could comfortably afford as a mortgage payment. If you find that you calculations exceed 30% of your annual income, then you may want to consider holding off on applying for a mortgage until your credit card balances and payments have decreased. Your mortgage payment should not stress your budget in any way and avoid banks that tell you can afford more than the number you have in mind. The numbers don’t lie, and its best to stick with the ones you feel most comfortable with.

Save up for a down payment

While most would rather finance their entire mortgage, many don’t realize that financing 100% of the purchase is perceived as a higher credit risk by the lender. If you have dreams of buying a home, it would be in your best interest to apply for a loan of no more than 80% of the total purchase price of the home. Banks look at the LTV or the loan to value ratio of the amount of your mortgage to the total purchase price of the home. The lower the down payment you make on the home, the higher your LTV will be which increases your chance of potentially getting denied for the loan. If you do not have any money saved, consider putting off your dreams of a home and start saving money up for a down payment. It can be something as simple as funneling $20 a week into a savings account. Over time you will have accrued enough money to cover the down payment that will make you look like a much better credit risk to your potential lender.

Check your credit report

Unless you already review your credit report once a year, make sure to pull your reports before you go to the bank. Make sure there are no errors on your credit report and that all the account statuses are correct. You will also want to make sure to keep all your payments current since your credit score can make or break your ability to qualify for a mortgage.

These tips can help you look like a better credit risk to potential mortgage lenders. Avoid taking on additional debt, and make sure to keep tabs on your credit report, and you will soon have obtained the level of creditworthiness that will make any lender want to work with you.