If you are trying to arrange financing to buy a house, there are four things you need:
1. Proof that you have the money for the down payment
2. Proof that you have stable income
3. The highest credit score you can get
4. Monthly income that is at least three times the mortgage payment
If you don’t have each of these items, the bank may tell you to take a hike. But here are 7 tips to help overcome landmines that stand between you and your home purchase – even if you have a spotty credit history.
1. Down Payment
Let’s say you don’t have the down payment and someone is gifting you the money. Get it into your name as soon as possible. My experience is that the banks look back 90 days to make sure the money has been there for a little while. The sooner you deposit that money, the sooner the clock starts ticking.
2. Stable Income
This is tough to manage. Either you have a stable job history or you don’t. Having said that, now isn’t the time to tell the boss what you really think about him. If you’re on the fence about your job, try to suck it up and hang in there…at least until your loan gets approved.
3. Improve Your Credit Score
Do everything you can to improve your credit score – I’ve written about this extensively. Fortunately, it isn’t that tough to boost your score and it doesn’t take that long.
If you like, you can see what your score is and find out what you are really dealing with. I signed up with Credit Sesame and I dig it because I didn’t have to sign up for any “free trials” or use my credit card. They also provide some useful info on how to lower credit costs without being too pushy.
4. Monthly Income
If you don’t have the income to justify a loan, my advice is simple. Either start looking for less expensive homes or earn more. Look into a weekend job or work more hours during the day. Again, do not under any circumstances get in over your head. You want a loan you can afford to pay, not a loan that is going to choke you. That will add undo pressure at home, and you’ll be miserable. It isn’t worth it. Believe me, I’ve seen this in real time and it’s not pretty.
5. Mortgage Brokers
I would look for a good mortgage broker, but they aren’t easy to find. Interview at least three and ask tons of questions. Get referrals from friends, but don’t rely blindly on that. Ask your questions anyway. As a matter of principle, I never work with anyone who pressures me, and this goes for mortgage brokers as well. Sure, interest rates are low right now. And there certainly is a chance they’ll be going up. But that’s no reason to act out of fear or pressure. If you spend a few extra weeks and make sure you’re working with the right person, that will more than make up for any increase in rates that may (or may not) manifest.
6. Take Advantage of the Current Market
Prices are still low. Look for sellers who are desperate to sell. You might come across a few that are willing to finance part or all of the purchase for you. This could be a huge savings in cost, time and interest rate. Don’t ignore this opportunity to ask for seller financing.
7. Partner Up
If you can’t qualify for a good loan, get a very close friend or family member to co-sign the loan or become a joint owner. The co-sign option exposes your partner to risk. If you fail to pay, they will have to pay or suffer dings on their credit report. They may prefer to buy the property themselves and then lease it to you with option to buy. This might help you buy time until you can qualify yourself.
If you take these 7 steps you’ll be doing everything you can to qualify for the best loan possible and take advantage of low real estate prices now. But remember, a bargain isn’t a bargain if you can’t afford it. Don’t sweat it. Wait until you can safely afford any financial obligation before you take it on.
What other steps should we take to qualify for a loan?
Mark says
September 23, 2011 at 11:19 AMHi Neal,
Thanks for the great article. I’d like to get your advice on an issue that I can’t seem to find much discussion on.
I’m a 25 year old young professional, who is currently renting. If I had to guess, I will probably rent until I get married, and I will likely have 20% saved up for a down payment on a house, a good credit score, and a stable income. My question is dealing with the monthly income relative to the mortgage payments.
Obviously with a working spouse, we’d be able to afford a much larger mortgage payment, but I assume that we’d have kids in the future. I’d hope that with promotions and raises that we would be able to afford the payments on one income for multiple years, but I wouldn’t want to stretch myself too thin. How would you advise young clients planning to buy, who could easily afford the mortgage payments with a dual income, but may have difficulty on just one income in the future if they were to start a family?
Neal Frankle says
September 23, 2011 at 11:21 AMMark — great question. Let me ponder. I’ll write a post on this one in the next week or two. Fair enough?
Mark says
September 23, 2011 at 12:30 PMMuch appreciated!