Get A Mortgage Loan Approval In 3 Easy Steps
Getting a mortgage loan approval is not that complicated – a little preparation will go a long long way.
A lot of people have yet to realize that the traditional bank loan experience is nearly obsolete. Really, there is no need to deal with impersonal Loan Officers that furrow their eyebrows when they see your credit report.
Denied for a home loan? Here’s a little dirty secret: most bank Loan Officers have no idea how credit scores really work, or how they can be improved. A lot of them don’t even know how to interpret your credit history, and build a strong case in front of an underwriter.
These same Loan Officers will deny you a mortgage loan, but will approve you for a $500/month new car payment! Why put your financial future in their hands?
It’s easy to be judgemental when you don’t have all the facts, but the truth is that most people with lower credit scores are not financially irresponsible. They either went through tough financial times (a lot caused by medical expenses), or they make errors that causes their credit score to drop (maxing out credit limits, applying for too many credit cards in a short period of time etc).
A person can have a great credit score but not a lot of financial ability to carry a mortgage loan. On the other extreme, someone can have a really low credit score, but be more than capable to meet monthly liabilities. Overall, what you did in the past 12 months is actually a lot more important than what you did in the past – than includes income wise, and payment history. Rent and credit cards/auto loans paid on time? Keep reading.
It’s critical to work with a mortgage Loan Officer that can make your loan application look good. Such a Loan Officer will never refer you to a credit repair company, because he/she should have the knowledge to help you. A credit repair company can treat symptoms (at a high cost!), but it’s usually in THEIR best interest to keep charging you a monthly subscription fee.
What if working towards an approval will only take you a month or two? What if in the process you actually learn how to make your credit profile look great, even with a few blemishes here and there..?
Step 1 – Take Charge
Go to www.annualcreditreport.com and get a free copy of your credit report from one (or each) of the credit bureaus. Look it over carefully, making sure the information on there is accurate.
Note that this will not give you your credit score, but that is less important at this stage. Credit Karma is not very accurate, so don’t count on their credit score.
Step 2 – Get To Work
Identify what you need to work on.
a) Check for errors, accounts that don’t belong to you, and delinquencies reported – dispute anything that doesn’t belong.
TIP REGARDING DISPUTES – it’s important to mention that once a dispute is initiated, the credit bureaus have 30 days to validate that account information, or they have to remove it (regardless of the ultimate accuracy of your dispute). I won’t go into details, but I do recommend you read this book if there is a lot you need to clean off your report. (for purchase on Amazon): Hidden Credit Repair Secrets
b) If you had a Bankruptcy, Foreclosure or Short sale, make sure you meet the required waiting periods:
FHA: 3 years wait from Foreclosure/Short sale; 2 years from Chapter 7 Bankruptcy discharge, 1 year from Chapter 13 Bankruptcy payment plan setup.
VA: 2 year wait on Foreclosures, Short Sales and Chapter 7 Bankruptcies; 1 year on the payment plan on a Chapter 13 Bankruptcy.
*You should have enough VA entitlement available for a new home even if your previous VA home was foreclosed on
USDA Rural loans: 3 year waiting period for Foreclosures, Short Sales, and Chapter 7 Bankruptcies; 1 year on the payment plan on a Chapter 13 Bankruptcy.
CONVENTIONAL: Foreclosure has a 7 year waiting period (auch!); Short Sale is 4 years; Chapter 7 Bankruptcy is 4 years, Chapter 13 Bankruptcy is 2 years.
*** Extenuating circumstances can sometimes cut these waiting periods in half.
c) Do you have judgements or tax liens? Student loans in default?
These are the more serious things to take care of. Judgements, tax liens (state and federal) and student loans in default must be either paid in full or under an installment agreement with 2-3 scheduled payments to show for.
Utah State Tax Liens are particularly tricky – read about how to remove them here, and keep in mind that it will take 30 days after your payment in full before they will issue a letter invalidating the lien (you then need to forward the letter to the credit bureaus).
The IRS Installment setup link can be found here.
d) Do you have accounts in collections?
Medical collection accounts are disregarded when it comes to your mortgage loan application. They still hurt your credit, but there’s really nothing you can do about it. For the future, keep track of the gazillion bills you get from different places and try to setup a payment plan before they go into collection status.
Other collection accounts are ok as long as they’re not less than 1 year old, and not more than $2,000 combined. Realistically, unless the collection agency agrees to remove a collection account once paid (and you want this in writing), paying them off makes no difference. A collection with or without a balance is still a collection and will impact your score pretty much the same.
e) Do you have late payments on any accounts?
Even if they’re accurate, as long as there’s not more than 2 in the past year, you should be fine. Have an explanation ready. Call the creditors and ask them if they will do a good faith removal or one or two of those payments (try to remove the more recent ones). Put an emphasis on your good payment history since, and the unique circumstances you found yourself in. Be nice in making this request – the creditors don’t have to comply.
f) Do you have any close-to-the-limit or maxed out accounts?
How much of your available credit are you using? Maxing out an account will take 20-60 points of your credit score easily. Maxing out all of your credit cards will send you right around the 550 credit score mark, alerting any other creditors to not extend credit because you might be jumping ship (people usually max out all their credit cards prior to filing for bankruptcy).
* One thing to note here is that even the most credit worthy people that pay off their credit cards in full each month can make the mistake of maxing out their credit cards. What gets reported to the credit bureaus is usually the balance at the time of your credit card statement. So make your payment prior to the statement being issued, and not after (or most of it – if you leave a balance, you still need to make the minimum payment after the statement is issued)
Step 3 – Go At It!
If you only need guidance, send me a copy of your credit report – I’ll return it with a full analysis of what you need to focus on in order to secure a mortgage loan approval.
Use my secure online application so I can pull your credit, and provide you with a free copy of your report.
I especially suggest contacting me if you’re planning on paying off credit card balances, but have limited funds. $200 applied to a certain card can get you a better score boost then applied to a different card, so you want to make sure you get the best bank for your buck.
Forget about advice such as paying the highest interest first. A higher credit score will save you money on your mortgage interest, on your auto and homeowner’s insurance, and who knows what else. The interest on a credit card is small change in comparison to the potential savings from a higher credit score.
Good things come to those who wait. Wouldn’t it be nice if this year you could own your home? If you could just gift your kids a puppy or a kitten without worrying if the landlord will allow it? If you could file that tax return and get a nice mortgage interest deduction?
Big changes start one step at a time.
If you want to improve your financial situation, owning a home is the way to go.